EL PASO ELECTRIC CO /TX/ (Form: 10-K405, Received: 03/27/2002 17:06:58)

Form 10–K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x ANNUAL

REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES

EXCHANGE ACT OF 1934

For

the fiscal year ended December 31, 2001

¨ TRANSITION

REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE

SECURITIES EXCHANGE ACT OF 1934

For

the transition period from to

Commission file number 0-296

El Paso Electric Company

(Exact name of registrant as specified in its charter)

Texas		74-0607870
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Stanton Tower, 100 North Stanton, El Paso, Texas		79901
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (915) 543-5711

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, No Par Value		American Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

As of March 11, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $751,211,115.

As of March 11, 2002, there were 50,288,779 shares of the Company’s no par value common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2002 annual meeting of its shareholders are incorporated by reference into Part III of this report.

DEFINITIONS

The following abbreviations, acronyms or defined terms used in this report are defined below:

Abbreviations, Acronyms or Defined Terms		Terms

ANPP Participation Agreement		Arizona Nuclear Power Project Participation Agreement dated August 23, 1973, as amended
APS		Arizona Public Service Company
CFE		Comision Federal de Electricidad de Mexico, the national electric utility of Mexico
Common Plant or Common Facilities		Facilities at or related to Palo Verde that are common to all three Palo Verde units
Company		El Paso Electric Company
DOE		United States Department of Energy
ESBG		The Company’s Energy Services Business Group
FERC		Federal Energy Regulatory Commission
Four Corners		Four Corners Generating Station
Freeze Period		Ten-year period beginning August 2, 1995, during which base rates for most Texas retail customers are expected to remain frozen pursuant to the Texas Rate Stipulation
IID		Imperial Irrigation District, an irrigation district in southern California
kV		Kilovolt(s)
kW		Kilowatt(s)
kWh		Kilowatt–hour(s)
Las Cruces		City of Las Cruces, New Mexico
MiraSol		MiraSol Energy Services, Inc., a wholly-owned subsidiary of the Company
MW		Megawatt(s)
MWh		Megawatt–hour(s)
New Mexico Commission		New Mexico Public Utility Commission or its successor, New Mexico Public Regulation Commission
New Mexico Fuel Factor Agreement		Case No. 3606 and Case No. 3737. An agreement between the Company and involved New Mexico parties to reinitiate a Fuel and Purchased Power Cost Adjustment Clause and freeze base rates for a two-year period.
New Mexico Restructuring Law		New Mexico Electric Utility Industry Restructuring Act of 1999
New Mexico Settlement Agreement		Stipulation and Settlement Agreement in Case No. 2722, between the Company, the New Mexico Attorney General, the New Mexico Commission staff and most other parties to the Company’s rate proceedings, excluding Las Cruces, before the New Mexico Commission providing for a 30–month moratorium on rate increases or decreases and other matters
NRC		Nuclear Regulatory Commission
Palo Verde		Palo Verde Nuclear Generating Station
Palo Verde Participants		Those utilities who share in power and energy entitlements, and bear certain allocated costs, with respect to Palo Verde pursuant to the ANPP Participation Agreement
PNM		Public Service Company of New Mexico
SFAS		Statement of Financial Accounting Standards
SPS		Southwestern Public Service Company
TEP		Tucson Electric Power Company
Texas Commission		Public Utility Commission of Texas
Texas Fuel Settlement		Texas Docket No. 23530. An agreement between the Company, the City of El Paso and various parties whereby the Company increased its fuel factors, implemented a fuel surcharge and revised its Palo Verde Nuclear Generating Station performance standards calculation.
Texas Rate Stipulation		Stipulation and Settlement Agreement in Texas Docket 12700, between the Company, the City of El Paso, the Texas Office of Public Utility Counsel and most other parties to the Company’s rate proceedings before the Texas Commission providing for a ten-year rate freeze and other matters
Texas Restructuring Law		Texas Public Utility Regulatory Act Chapter 39, Restructuring of the Electric Utility Industry
Texas Settlement Agreement		Settlement Agreement in Texas Docket 20450, between the Company, the City of El Paso and various parties providing for a reduction of the Company’s jurisdictional base revenue and other matters
TNP		Texas-New Mexico Power Company

(i)

TABLE OF CONTENTS

Item	Description	Page

PART I

1	Business	1
2	Properties	19
3	Legal Proceedings	19
4	Submission of Matters to aVote of Security Holders	19

PART II

5	Market for Registrant’s Common Equity and Related Stockholder Matters	20
6	Selected Financial Data	21
7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
7A	Quantitative and Qualitative Disclosures About Market Risk	32
8	Financial Statements and Supplementary Data	35
9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	78

PART III

10	Directors and Executive Officers of the Registrant	78
11	Executive Compensation	78
12	Security Ownership of Certain Beneficial Owners and Management	78
13	Certain Relationships and Related Transactions	78

PART IV

14	Exhibits, Financial Statement Schedules and Reports on Form 8–K	78

(ii)

PART I

Item 1. Business

General

El Paso Electric Company is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. The Company also serves wholesale customers in Texas, New Mexico, California and Mexico and through its subsidiary, MiraSol Energy Services, Inc., offers a variety of services to reduce energy use and/or lower energy costs. The Company owns or has significant ownership interests in six electrical generating facilities providing it with a total capacity of approximately 1,500 MW. For the year ended December 31, 2001, the Company’s energy sources consisted of approximately 49% nuclear fuel, 32% natural gas, 8% coal, 11% purchased power and less than 1% generated by wind turbines.

The Company serves approximately 309,000 residential, commercial, industrial and wholesale customers. The Company distributes electricity to retail customers principally in El Paso, Texas and Las Cruces, New Mexico (representing approximately 52% and 7%, respectively, of the Company’s electric utility operating revenues for the year ended December 31, 2001). In addition, the Company’s wholesale sales include sales for resale to the Imperial Irrigation District, Texas-New Mexico Power Company and the Comision Federal de Electricidad de Mexico, as well as sales to power marketers and other electric utilities. Principal industrial and other large customers of the Company include steel production, copper and oil refining, and United States military installations, including the United States Army Air Defense Center at Fort Bliss in Texas and White Sands Missile Range and Holloman Air Force Base in New Mexico.

The Company’s principal offices are located at the Stanton Tower, 100 North Stanton, El Paso, Texas 79901 (telephone 915-543-5711). The Company was incorporated in Texas in 1901. As of March 11, 2002, the Company had approximately 1,000 employees, 31% of whom are covered by a collective bargaining agreement.

Facilities

The Company’s net installed generating capacity of approximately 1,500 MW consists of approximately 600 MW from Palo Verde Units 1, 2 and 3, 482 MW from its Newman Power Station, 246 MW from its Rio Grande Power Station, 104 MW from Four Corners Units 4 and 5, 68 MW from its Copper Power Station and 1.32 MW from Hueco Mountain Wind Ranch.

Palo Verde Station

The Company owns a 15.8% interest in each of the three nuclear generating units and Common Facilities at Palo Verde, located 50 miles west of Phoenix, Arizona. The Palo Verde Participants include the Company and six other utilities: APS, Southern California Edison Company, PNM, Southern California Public Power Authority, Salt River Project Agricultural Improvement and Power District and the Los Angeles Department of Water and Power. APS serves as operating agent for Palo Verde.

The NRC has granted facility operating licenses and full power operating licenses for Palo Verde Units 1, 2 and 3, which expire in 2024, 2025 and 2027, respectively. In addition, the Company is separately licensed by the NRC to own its proportionate share of Palo Verde.

Pursuant to the ANPP Participation Agreement, the Palo Verde Participants share costs and generating entitlements in the same proportion as their percentage interests in the generating units, and each participant is required to fund its proportionate share of fuel, other operations, maintenance and capital costs. The ANPP Participation Agreement provides that if a participant fails to meet its payment obligations, each non–defaulting participant shall pay its proportionate share of the payments owed by the defaulting participant.

Decommissioning. Pursuant to the ANPP Participation Agreement and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3, including the Common Facilities, over their estimated useful lives of 40 years (to 2024, 2025 and 2027, respectively). The Company’s funding requirements are determined periodically based upon engineering cost estimates performed by outside engineers retained by APS.

In December 2001, the Palo Verde Participants received a preliminary version of the 2001 decommissioning study. The 2001 preliminary study determined that the Company will have to fund approximately $312.2 million (stated in 2001 dollars) to cover its share of decommissioning costs. The previous cost estimate from a 1998 study determined that the Company would have to fund approximately $280.5 million (stated in 1998 dollars). The 2001 estimate reflects a 11.3% increase from the 1998 estimate primarily due to increases in estimated costs for site restoration at each unit, spent fuel storage after operations have ceased and for the Unit 2 steam generator storage. The Company anticipates Palo Verde Participant approval of the 2001 preliminary study in the second quarter of 2002 with no significant changes. See “Spent Fuel Storage” below.

Although the 2001 preliminary study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not continue to increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to significant uncertainty. The decommissioning study is updated every three years and a new study is expected to be completed in 2004. See “Disposal of Low-Level Radioactive Waste” below.

Historically, regulated utilities such as the Company have been permitted to collect in rates the costs of nuclear decommissioning. Under deregulation legislation in both Texas and New Mexico, the Company expects to continue to be able to collect from customers the costs of decommissioning. The collection mechanism in both states will be a “non-bypassable wires charge” through which all customers, even those who choose to purchase energy from a supplier other than the Company, will pay a fee to the Company’s electric distribution subsidiary. The amount of this fee will be approved by the Texas and New Mexico Commissions and will cover decommissioning, among other things. In the Company’s case, the fee will begin to be collected in Texas following the end of the Freeze Period in August 2005 and in New Mexico in 2007, which is the current date for the beginning of retail deregulation. See “Regulation – Texas Regulatory Matters – Deregulation” for further discussion. While the Company is entitled to collect decommissioning costs in full under Texas law, there is some uncertainty in New Mexico as to the ability to collect 100% of such costs. See “Regulation – New Mexico Regulatory Matters.”

Spent Fuel Storage . The spent fuel storage facilities at Palo Verde will have sufficient capacity to store all fuel expected to be discharged from normal operation of all three Palo Verde units through 2003. Alternative on-site storage facilities are currently being constructed to supplement existing facilities. Spent fuel will be removed from the original facilities as necessary and placed in special storage casks which will be stored at the new facilities until accepted by the DOE for permanent disposal. The alternative facilities will be built in stages to accommodate casks on an as needed basis and are expected to be available for use by the end of 2002. APS believes that spent fuel storage or disposal methods will be available for use by Palo Verde to allow its continued operation through the term of the operating license for each Palo Verde unit.

Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the “Waste Act”), the DOE is legally obligated to accept and dispose of all spent nuclear fuel and other high–level radioactive waste generated by all domestic power reactors. In accordance with the Waste Act, the DOE entered into a spent nuclear fuel contract with the Company and all other Palo Verde Participants. In November 1989, the DOE reported that its spent nuclear fuel disposal facilities would not be in operation until 2010. Subsequent judicial decisions required the DOE to start accepting spent nuclear fuel by January 31, 1998. The DOE did not meet that deadline, and the Company cannot currently predict when spent fuel shipments to the DOE’s permanent disposal site will commence.

In July 1998, APS filed, on behalf of all Palo Verde Participants, a petition for review with the United States Court of Appeals for the District of Columbia Circuit seeking confirmation that findings by the Circuit Court in a prior case brought by Northern States Power regarding the DOE’s failure to comply with its obligation to begin accepting spent nuclear fuel would apply to all spent nuclear fuel contract holders. The Circuit Court held APS’ petition in abeyance pending the United States Supreme Court’s decision to review the Northern States Power case. In November 1998, the Supreme Court denied review of this case. The Circuit Court subsequently dismissed APS’ petition after the Circuit Court issued clarifying orders essentially granting the relief sought by APS. APS is monitoring pending litigation between the DOE and other nuclear operators before initiating further legal proceedings or other procedural measures on behalf of the Palo Verde Participants to enforce the DOE’s statutory and contractual obligations. The Company is unable to predict the outcome of these matters at this time.

The Company expects to incur significant on-site spent fuel storage costs during the life of Palo Verde that the Company believes are the responsibility of the DOE. These costs will be expensed as incurred until an agreement is reached with the DOE for recovery of these costs. However, the Company cannot predict when, if ever, these additional costs will be recovered from the DOE.

Disposal of Low-Level Radioactive Waste. Congress has established requirements for the disposal by each state of low-level radioactive waste generated within its borders. Arizona, California, North Dakota and South Dakota have entered into a compact (the “Southwestern Compact”) for the disposal of low–level radioactive waste. California will act as the first host state of the Southwestern Compact, and Arizona will serve as the second host state. The construction and opening of the California low-level radioactive waste disposal site in Ward Valley has been delayed due to extensive public hearings, disputes over environmental issues and review of technical issues related to the proposed site. Palo Verde is projected to undergo decommissioning during the period in which Arizona will act as host for the Southwestern Compact. However, the opposition, delays, uncertainty and costs experienced in California demonstrate possible roadblocks that may be encountered when Arizona seeks to open its own waste repository. APS currently believes that interim low-level waste storage methods are or will be

available for use by Palo Verde to allow its continued operation and to safely store low-level waste until a permanent disposal facility is available.

Steam Generators. Palo Verde has experienced some degradation in the steam generator tubes of each unit. APS has undertaken an ongoing investigation and analysis and has performed corrective actions designed to mitigate further degradation. Corrective actions have included changes in operational procedures designed to lower the operating temperatures of the units, chemical cleaning and the implementation of other technical improvements. APS believes its remedial actions have slowed the rate of tube degradation.

The projected service lives of the units’ steam generators are reassessed by APS periodically in conjunction with inspections made during scheduled outages of the Palo Verde units. In December 1999, the Palo Verde Participants unanimously approved installation of new steam generators in Unit 2. This decision was based on an analysis of the net economic benefit from expected improved performance of the unit and the need to realize continued production from that unit over its full licensed life. APS has advised the Company that the fabrication of Unit 2 steam generators is proceeding on schedule, with plans to install the replacement steam generators at Unit 2 during the fall 2003 refueling outage. The Company’s portion of total costs associated with construction and installation of new steam generators in Unit 2 is currently estimated not to exceed $45 million, including approximately $4.9 million of replacement power costs.

Recently, APS discovered potential accelerated degradation in the tubes in Units 1 and 3 and has tentatively concluded that it may be economically desirable to replace the steam generators at those units. While the economic analysis is not yet complete, and a final determination of whether Units 1 and 3 will require steam generator replacement to operate over their full licensed lives has not yet been made, the Company and the other participants have approved the expenditure of $25.6 million (the Company’s portion being $4.04 million) in 2002 to procure long lead time materials for fabrication of a spare set of steam generators for either Unit 1 or 3. The Company also anticipates a request from APS in the summer of 2002 for approval to spend up to $70.0 million (the Company’s portion being $11.0 million) for the fabrication of one spare set of steam generators to be used in either Unit 1 or 3. These actions will provide the Palo Verde participants an option to replace the steam generators at either Unit 1 or 3 as early as fall 2005, should they ultimately choose to do so.

If the participants decide to proceed with steam generator replacement at both Units 1 and 3, APS has estimated that the Company’s portion of the fabrication and installation costs and associated power uprate modifications would range from $72.0 to $80.0 million over the next six years. The Company expects its portion would be funded with internally generated cash. Any such replacements would also require the unanimous approval of the Palo Verde participants.

The Texas Rate Stipulation precludes the Company from seeking a rate increase to recover additional capital costs incurred at Palo Verde during the Freeze Period. The Company may request recovery of a portion of these costs through regulated rates in New Mexico. See “Regulation – New Mexico Regulatory Matters” for further discussion. Finally, the Company cannot assure that it will be able to recover these capital costs through its wholesale power rates or its competitive retail rates that become applicable after the start of competition. See also Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

Liability and Insurance Matters. In 1957, Congress enacted the Price-Anderson Act as an amendment to the Atomic Energy Act to provide a system of financial protection for persons who may be injured and persons who may be liable for a nuclear incident. The amount of DOE indemnification currently available under the act is $9.43 billion. Additionally, the Palo Verde Participants have public liability insurance against nuclear energy hazards up to the full limit of liability under the Price-Anderson Act. The insurance consists of $200 million of primary liability insurance provided by commercial insurance carriers, with the balance being provided by an industry-wide retrospective assessment program, pursuant to which industry participants would be required to pay a retrospective assessment to cover any loss in excess of $200 million. Effective August 1998, the maximum retrospective assessment per reactor for each nuclear incident is approximately $88.1 million, subject to an annual limit of $10 million per incident. Based upon the Company’s 15.8% interest in Palo Verde, the Company’s maximum potential retrospective assessment per incident is approximately $41.8 million for all three units with an annual payment limitation of approximately $4.7 million.

The Price-Anderson Act was amended in 1988 to extend its term until August 1, 2002. On that date, the DOE’s authority to provide DOE indemnification in a contract will expire. Accordingly, if the Price-Anderson Act is not extended, the DOE indemnification will not cover activity under any contract entered into after August 1, 2002. That expiration will not affect activity under a contract in effect on that date. In November 2001, the U.S. House of Representatives voted in favor of reauthorization of the Price-Anderson Act. The measure, H.R. 2983, extends Price-Anderson coverage for an additional fifteen years. The U.S. Senate could take up the measure early in the second session of the 107th Congress.

The Palo Verde Participants maintain “all risk” (including nuclear hazards) insurance for damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. Finally, the Company has obtained insurance against a portion of any increased cost of generation or purchased power which may result from an accidental outage of any of the three Palo Verde units if the outage exceeds 12 weeks.

Newman Power Station

The Company’s Newman Power Station, located in El Paso, Texas, consists of three steam-electric generating units and one combined cycle generating unit, with an aggregate capacity of 482 MW. The units operate primarily on natural gas, but can also operate on fuel oil.

Rio Grande Power Station

The Company’s Rio Grande Power Station, located in Sunland Park, New Mexico, adjacent to El Paso, Texas, consists of three steam-electric generating units with an aggregate capacity of 246 MW. The units operate primarily on natural gas, but can also operate on fuel oil.

Four Corners Station

The Company owns a 7% interest, or approximately 104 MW, in Units 4 and 5 at Four Corners, located in northwestern New Mexico. The two coal-fired generating units each have a total generating capacity of 739 MW. The Company shares power entitlements and certain allocated costs of the two units with APS (the Four Corners operating agent) and the other participants.

Four Corners is located on land held on easements from the federal government and a lease from the Navajo Nation that expires in 2016. Certain of the facilities associated with Four Corners, including transmission lines and almost all of the contracted coal sources, are also located on Navajo land. Units 4 and 5 are located adjacent to a surface-mined supply of coal.

Copper Power Station

The Company’s Copper Power Station, located in El Paso, Texas, consists of a 68 MW combustion turbine used primarily to meet peak demands. The unit operates primarily on natural gas, but can also operate on fuel oil. The Company leases the combustion turbine and other generation equipment at the station under a lease that expires in July 2005, with an extension option for two additional years.

Hueco Mountain Wind Ranch

The Company’s Hueco Mountain Wind Ranch, located in Hudspeth County, east of El Paso County and adjacent to Horizon City, currently consists of two wind turbines with a total capacity of 1.32 MW.

Transmission and Distribution Lines and Agreements

The Company owns or has significant ownership interests in four major 345 kV transmission lines, three 500 kV lines in Arizona, and owns the distribution network within its retail service area. The Company is also a party to various transmission and power exchange agreements that, together with its owned transmission lines, enable the Company to obtain its energy entitlements from its remote generation sources at Palo Verde and Four Corners. Pursuant to standards established by the North American Electric Reliability Council, the Company operates its transmission system in a way that allows it to maintain complete system integrity in the event of any one of these transmission lines being out of service.

Springerville-Diablo Line. The Company owns a 310-mile, 345 kV transmission line from TEP’s Springerville Generating Plant near Springerville, Arizona, to the Luna Substation near Deming, New Mexico, and to the Diablo Substation near Sunland Park, New Mexico, providing an interconnection with TEP for delivery of the Company’s generation entitlements from Palo Verde and, if necessary, Four Corners.

Arroyo-West Mesa Line. The Company owns a 202-mile, 345 kV transmission line from the Arroyo Substation located near Las Cruces, New Mexico, to PNM’s West Mesa Substation located near Albuquerque, New Mexico. This is the primary delivery point for the Company’s generation entitlement from Four Corners, which is transmitted to the West Mesa Substation over approximately 150 miles of transmission lines owned by PNM.

Greenlee-Newman Line. As a participant in the Southwest New Mexico Transmission Project Participation Agreement, the Company owns 40% of a 60-mile, 345 kV transmission line from TEP’s Greenlee Substation in Arizona to the Hidalgo Substation near Lordsburg, New Mexico, 57.2% of a 50–mile, 345 kV transmission line between the Hidalgo Substation and the Luna Substation near Deming, New Mexico, and 100% of an 86-mile, 345 kV transmission line between the Luna Substation

and the Newman Power Station. These lines provide an interconnection with TEP for delivery of the Company’s entitlements from Palo Verde and, if necessary, Four Corners.

AMRAD-Eddy County Line. The Company owns 66.7% of a 125–mile, 345 kV transmission line from the AMRAD Substation near Oro Grande, New Mexico, to the Company’s and TNP’s high voltage direct current terminal at the Eddy County Substation near Artesia, New Mexico. This terminal enables the Company to connect its transmission system to that of SPS, providing the Company with access to emergency power from SPS and power markets to the east.

Palo Verde Transmission and Switchyard. The Company owns 18.7% of two 45-mile, 500 kV lines from Palo Verde to the Westwing Substation and a 75-mile, 500 kV line from Palo Verde to the Kyrene Substation. These lines provide the Company with a transmission path for delivery of power from Palo Verde. The Company will also own 18.7% of a new 500 kV switchyard that is under construction adjacent to the southern edge of the Palo Verde 500 kV switchyard. This new switchyard is being built to accommodate the addition of new generation and transmission in the Palo Verde area and will intersect with the Company’s Kyrene 500 kV transmission line. The construction cost of the new switchyard will be paid by certain third-party users.

Environmental Matters

The Company is subject to regulation with respect to air, soil and water quality, solid waste disposal and other environmental matters by federal, state, tribal and local authorities. Those authorities govern current facility operations and exercise continuing jurisdiction over facility modifications. Environmental regulations can change rapidly and are difficult to predict. Substantial expenditures may be required to comply with these regulations. The Company analyzes the costs of its obligations arising from environmental matters on an ongoing basis, and management believes it has made adequate provision in its financial statements to meet such obligations. Currently, the Company has provision for environmental remediation obligations of approximately $0.6 million. However, unforeseen expenses associated with compliance could have a material adverse effect on the future operations and financial condition of the Company.

Construction Program

Utility construction expenditures reflected in the following table consist primarily of expanding and updating the transmission and distribution systems and the cost of capital improvements and replacements at Palo Verde and other generating facilities, including the replacement of the Palo Verde Unit 2 steam generators and long lead time materials for one additional set of steam generators. APS has estimated that if approved by the Palo Verde Participants, the Company’s share of additional costs for the replacement of steam generators and power uprate modifications for Palo Verde Units 1 and 3 would range from $72.0 to $80.0 million for the period 2002 through 2007. Replacement power costs expected to be incurred during replacements of Palo Verde steam generators are not included in construction costs. The Company is also evaluating the future need for additional generation resources by 2006. Estimates for the addition of a new generating unit from 2002 through 2006 is approximately $61.0 million. No final plan, however, for a new generation source has been adopted.

The Company’s estimated cash construction costs for 2002 through 2005 are approximately $270 million. Actual costs may vary from the construction program estimates shown. Such estimates are reviewed and updated periodically to reflect changed conditions.

By Year (1)(2) (In millions)		By Function (2) (In millions)
2002	$ 75	Production (1)	$ 94
2003	73	Transmission	16
2004	64	Distribution	110
2005	58	General	50

Total	$270	Total	$270

(1)

Does not include acquisition costs for nuclear fuel. See “Energy Sources – Nuclear Fuel.”

(2)

Does not include possible costs for replacement of Units 1 and 3 steam generators or additional generation.

Energy Sources

General

The following table summarizes the percentage contribution of nuclear fuel, natural gas, coal and purchased power to the total kWh energy mix of the Company. Energy generated by wind turbines accounted for less than 1% of the total kWh energy mix.

	Years Ended December 31,
Power Source	2001		2000		1999
Nuclear fuel	49	%	50	%	55	%
Natural gas	32		33		33
Coal	8		8		8
Purchased power	11		9		4

Total	100	%	100	%	100	%

Allocated fuel and purchased power costs are generally passed through directly to customers in Texas and New Mexico pursuant to applicable regulations. Historical fuel costs and revenues are reconciled periodically in proceedings before the Texas and New Mexico Commissions to determine whether a refund or surcharge based on such historical costs and revenues is necessary. However, from October 1998 to June 2001, the Company’s New Mexico fixed fuel factor had been incorporated into its frozen base rates pursuant to the New Mexico Settlement Agreement. Therefore, there were no fuel reconciliation filings before the New Mexico Commission during that time period. See “Regulation – Texas Regulatory Matters” and “– New Mexico Regulatory Matters.”

Nuclear Fuel

The nuclear fuel cycle for Palo Verde consists of the following stages: the mining and milling of uranium ore to produce uranium concentrates; the conversion of the uranium concentrates to uranium hexaflouride; the enrichment of uranium hexaflouride; the fabrication of fuel assemblies; the utilization of the fuel assemblies in the reactors; and the storage and disposal of the spent fuel. The Palo Verde Participants have contracts for uranium concentrates anticipated to be sufficient to meet 100% of Palo Verde’s operational requirements in 2002 and 67% in 2003. Spot purchases on the uranium market will be made, as appropriate, for any uranium concentrates that may not be obtained through these contracts. The Palo Verde Participants also have contracts in place for conversion and enrichment services to meet all of the plant requirements in 2002 and 2003. The Palo Verde Participants have a new enrichment uranium product contract that will furnish up to 100% of Palo Verde’s operational requirements for uranium concentrates, conversion services and enrichment services from 2004 through 2008. This contract could also provide 100% of enrichment services in 2009 and 2010. The Palo Verde Participants have contracts for fuel assembly fabrication services through 2015 for each Palo Verde unit.

Nuclear Fuel Financing. Pursuant to the ANPP Participation Agreement, the Company owns an undivided interest in nuclear fuel purchased in connection with Palo Verde. The Company has available a total of $100 million under a revolving credit facility that provides for both working capital and up to $70 million for the financing of nuclear fuel. At December 31, 2001, approximately $48.3 million had been drawn to finance nuclear fuel. This financing is accomplished through a trust that borrows under the facility to acquire and process the nuclear fuel. The Company is obligated to repay the trust’s borrowings with interest and has secured this obligation with First Mortgage Collateral Series Bonds. In the Company’s financial statements, the assets and liabilities of the trust are reported as assets and liabilities of the Company.

Natural Gas

The Company manages its natural gas requirements through a combination of long-term contracts and market purchases. In 2001, the Company’s natural gas requirements at the Rio Grande Power Station were met with both short-term and long-term natural gas purchases from various suppliers. Interstate gas is delivered under a firm transportation agreement which expires in 2005. The Company anticipates it will continue to purchase natural gas at market prices on a monthly basis for a portion of the fuel needs for the Rio Grande Power Station for the near term. To complement those monthly purchases in 2002, the Company has entered into a one-year and a two-year fixed-price gas supply contract. The Company will continue to evaluate the availability of short-term natural gas supplies versus long-term supplies to maintain a reliable and economical supply for the Rio Grande Power Station.

In 2001, natural gas for the Newman and Copper Power Stations was supplied primarily pursuant to an intrastate natural gas contract that became effective January 1, 1997. However, the vendor has given the Company a notice of termination of the current contract effective December 2002 and indicated its desire to negotiate a new agreement. The Company is currently negotiating a new contract with its current vendor and evaluating other options including use of its interstate pipeline supply for 2003 and beyond. Based upon pipeline capacity and natural gas availability, the Company believes that a new contract which meets the Company’s needs will be negotiated and effective January 2003. The Company will also continue to evaluate short-term natural gas supplies to maintain a reliable and economical supply for the Newman and Copper Power Stations.

Coal

APS, as operating agent for Four Corners, purchases Four Corners’ coal requirements from a supplier with a long-term lease of coal reserves owned by the Navajo Nation. The lease expires in 2004 and can be extended for an additional 15 years. Based upon information from APS, the Company believes that Four Corners has sufficient reserves of coal to meet the plant’s operational requirements for its useful life.

Purchased Power

To supplement its own generation and operating reserves, the Company engages in firm and non-firm power purchase arrangements which may vary in duration and amount based on evaluation of the Company’s resource needs and the economics of the transactions. For 2001, the Company purchased 60 MW of firm on-peak energy for June through September at the Palo Verde switchyard. In addition, the Company purchased monthly 103 MW of firm on-peak block energy. Other purchases of shorter duration were made primarily to replace the Company’s generation resources during planned and unplanned outages.

As of March 11, 2002, the Company had entered into the following agreements with counterparties for forward fixed price firm purchases of electricity:

Type of Contract	Quantity	Term
On-peak	128 MW (1)	2002
On-peak	25 MW	April through October 2002
On-peak	60 MW	June through September 2002
On-peak	103 MW (1)	2003 through 2005

(1)

Portions of these contracts include fuel adjustment clauses.

Enron Power Marketing, Inc. (“Enron”) is a counterparty to 50 MW of the 128 MW firm purchases for 2002. If Enron fails to perform under that contract, the Company believes that it will be able to obtain replacement power at prices lower than those payable to Enron under the contract. Enron is also the counterparty to the 60 MW contract for June through September 2002; however, this contract is fully offset by a 60 MW sale to Enron for the same price and time period. See “Power Sales Contracts.”

Operating Statistics

		Years Ended December 31,
		2001				2000				1999
Electric utility operating revenues (in thousands):
Retail:
Residential		$	195,214			$	184,769			$	164,524
Commercial and industrial, small			206,815				192,895				175,924
Commercial and industrial, large			70,959				65,687				59,497
Sales to public authorities			93,059				86,957				80,393

Total retail			566,047				530,308				480,338

Wholesale:
Sales for resale			86,443				70,162				49,441
Economy sales			92,452				84,918				32,523

Total wholesale			178,895				155,080				81,964

Other			9,582				11,020				6,076

Total electric utility operating revenues		$	754,524			$	696,408			$	568,378

Number of customers (end of year):
Residential			276,200				271,588				266,627
Commercial and industrial, small			28,573				27,947				27,274
Commercial and industrial, large			140				133				124
Other			4,308				4,054				3,957

Total			309,221				303,722				297,982

Average annual kWh use per residential customer			6,529				6,553				6,268

Energy supplied, net, kWh (in thousands):
Generated			8,183,713				8,706,790				8,392,890
Purchased and interchanged			951,359				905,770				328,225

Total			9,135,072				9,612,560				8,721,115

Energy sales, kWh (in thousands):
Retail:
Residential			1,789,199				1,767,928				1,653,859
Commercial and industrial, small			2,069,517				2,026,768				1,943,120
Commercial and industrial, large			1,174,235				1,142,163				1,133,751
Sales to public authorities			1,185,521				1,177,883				1,135,438

Total retail			6,218,472				6,114,742				5,866,168

Wholesale:
Sales for resale			1,460,383				1,282,540				905,975
Economy sales			929,914				1,714,288				1,497,880

Total wholesale			2,390,297				2,996,828				2,403,855

Total energy sales			8,608,769				9,111,570				8,270,023
Losses and Company use			526,303				500,990				451,092

Total			9,135,072				9,612,560				8,721,115

Native system:
Peak load, kW			1,199,000				1,159,000				1,159,000
Net generating capacity for peak, kW			1,500,000				1,500,000				1,500,000
Load factor			64.6	%			65.4	%			62.5	%

Total system:
Peak load, kW			1,425,000				1,360,000				1,287,000
Net generating capacity for peak, kW			1,500,000				1,500,000				1,500,000
Load factor	64.1%				64.3%				62.9%

Regulation

General

In 1999, both Texas and New Mexico enacted electric utility industry restructuring laws requiring competition in certain functions of the industry and ultimately in the Company’s service area. Competition in New Mexico was scheduled to begin on January 1, 2002 under the New Mexico Restructuring Law. On March 8, 2001, however, the New Mexico Restructuring Law was amended to delay the start of competition for five years until January 1, 2007. Under the Texas Restructuring Law, the Company’s Texas service area is exempt from competition until the expiration of the Freeze Period in August 2005.

The Company continues to work to become more competitive in response to these restructuring laws and to other regulatory, economic and technological changes occurring throughout the industry. Deregulation of the production of electricity and related services and increasing customer demand for lower priced electricity and other energy services have accelerated the industry’s movement toward more competitive pricing and cost structures. Those competitive pressures could result in the loss of customers and diminish the ability of the Company to fully recover its investment in generation assets. In January 2002, competition was initiated in most parts of Texas. As a result, the Company may face increasing pressure on its retail rates and its rate freeze under the Texas Rate Stipulation. The Company’s results of operations and cash flows may be adversely affected if it cannot maintain its current retail rates.

Texas Regulatory Matters

The rates and services of the Company in Texas municipalities are regulated by those municipalities and in unincorporated areas by the Texas Commission. The largest municipality in the Company’s service area is the City of El Paso. The Texas Commission has exclusive appellate jurisdiction to review municipal orders and ordinances regarding rates and services in Texas and jurisdiction over certain other activities of the Company. The decisions of the Texas Commission are subject to judicial review.

Deregulation. The Texas Restructuring Law requires an electric utility to separate its power generation activities from its transmission and distribution activities by January 1, 2002. In January 2002, competition was instituted in most parts of Texas. Nonetheless, the Texas Restructuring Law specifically recognizes and preserves the substantial benefits the Company bargained for in its Texas Rate Stipulation and Texas Settlement Agreement, exempting the Company’s Texas service area from retail competition, and preserving rates at their current levels until the end of the Freeze Period. At the end of the Freeze Period, the Company will be subject to retail competition and at that time will be permitted to recover nuclear decommissioning costs in rates, but will have no further claim for recovery of stranded costs. Stated simply, stranded costs are the positive difference, if any, between the book value of electric generating assets, including long-term purchase power contracts, and the market value of those assets. The Company believes that its continued ability to provide bundled electric service at current rates in its Texas service area will allow the Company to collect its Texas jurisdictional stranded costs because (i) the Company does not have power purchase contracts that extend beyond 2005 and

(ii) the Company revalued its utility plant under fresh start accounting in 1996 so that the generation assets would be reflective of projected market values in a deregulated environment.

Although the Company is not subject to the Texas restructuring requirements until the expiration of the Freeze Period, the Company sought Texas Commission approval of the Company’s corporate restructuring in anticipation of complying with the restructuring requirements of the New Mexico Restructuring Law. In December 2000, the Texas Commission approved the Company’s corporate restructuring plan. However, the amended New Mexico Restructuring Law now prohibits the separation of the Company’s generation activities from its transmission and distribution activities before September 1, 2005, directly conflicting with the Texas Restructuring Law requiring separation of these activities after the expiration of the Freeze Period in August 2005. Accordingly, in either 2004 or 2005, the Company will seek New Mexico Commission approval to separate the Company’s generation activities from its transmission and distribution activities to allow the Company to comply with the Texas Restructuring Law requirements.

Texas Rate Stipulation and Texas Settlement Agreement. The Texas Rate Stipulation and Texas Settlement Agreement govern the Company’s rates for its Texas customers, but do not deprive the Texas regulatory authorities of their jurisdiction over the Company during the Freeze Period. However, the Texas Commission determined that the rate freeze is in the public interest and results in just and reasonable rates. Further, the signatories to the Texas Rate Stipulation (other than the Texas Office of Public Utility Counsel and the State of Texas) agreed not to seek to initiate an inquiry into the reasonableness of the Company’s rates during the Freeze Period and to support the Company’s entitlement to rates at the freeze level throughout the Freeze Period. The Company believes, but cannot assure, that its cost of service will support rates at or above the freeze level throughout the Freeze Period and, therefore, does not believe any attempt to reduce the Company’s rates would be successful. However, during the Freeze Period, the Company is precluded from seeking base rate increases in Texas, even in the event of increased operating or capital costs. In the event of a merger, the parties to the Texas Rate Stipulation retain all rights provided in the Texas Rate Stipulation, the right to participate as a party in any proceeding related to the merger, and the right to pursue a reduction in rates below the freeze level to the extent of post-merger synergy savings.

Fuel. Although the Company’s base rates are frozen in Texas, pursuant to Texas Commission rules and the Texas Rate Stipulation, the Company can request adjustments to its fuel factor to more accurately reflect projected energy costs associated with the provision of electricity as well as seek recovery of past undercollections of fuel revenues.

In October 2001, the Texas Commission approved a unanimous settlement agreement (the “Texas Fuel Settlement”) between the Company and the parties which had intervened, including the City of El Paso, which increased the Texas fuel factor to $0.02494 per kWh. This factor was implemented on an interim basis in April 2001 and increased fuel revenue collections by $11.7 million for the year ended December 31, 2001. The Texas Fuel Settlement also provides for the surcharge of underrecovered fuel costs as of December 31, 2000 of approximately $15 million plus interest over an 18–month period. The fuel surcharge was implemented on an interim basis beginning with the first billing cycle in June 2001. The Texas Fuel Settlement provides for the final agreement between the parties for the non-recovery of certain purchased power contract costs as well as the favorable disposition of previously unrecognized Palo Verde performance rewards, including interest. These provisions taken together did not have a material effect on the Company’s results of operations and resulted in an $11.0 million increase in Net Undercollection of Fuel Revenues and a $10.5 million increase in Deferred

Credits and Other Liabilities – Other, which were recorded in June 2001. The Company also agreed to a prospective change in the Palo Verde performance standards, which materially reduced the potential for future rewards and penalties on a symmetrical basis.

The Company anticipates terminating its interim fuel surcharge earlier than expected and anticipates filing a petition with the Texas Commission in April 2002 to end that surcharge of underrecovered fuel costs. The interim fuel surcharge, as well as the Company’s other energy expenses through year–end 2001, will be subject to final review by the Texas Commission in the Company’s next fuel reconciliation proceeding, which is expected to be filed in June 2002. The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses.

Palo Verde Performance Standards. The Texas Commission established performance standards for the operation of Palo Verde, pursuant to which each Palo Verde unit is evaluated annually to determine whether its three-year rolling average capacity factor entitles the Company to a reward or subjects it to a penalty. As mentioned above these performance standards were materially altered during 2001. The capacity factor is calculated as the ratio of actual generation to maximum possible generation. If the capacity factor, as measured on a station-wide basis for any consecutive 24–month period, should fall below 35%, the Texas Commission can also reconsider the rate treatment of Palo Verde, regardless of the provisions of the Texas Rate Stipulation and the Texas Settlement Agreement. The removal of Palo Verde from rate base could have a significant negative impact on the Company’s revenues and financial condition. The Company has calculated approximately $1 million of performance rewards for the 2001 reporting period. These rewards will be included, along with energy costs incurred, as part of the Texas Commission’s review during the periodic fuel reconciliation proceedings discussed above. Those performance rewards will not be recorded on the Company’s books until the Texas Commission has ordered a final determination in a fuel reconciliation proceeding. Performance penalties are recorded when assessed as probable by the Company.

New Mexico Regulatory Matters

The New Mexico Commission has jurisdiction over the Company’s rates and services in New Mexico and over certain other activities of the Company, including prior approval of the issuance, assumption or guarantee of securities. The New Mexico Commission’s decisions are subject to judicial review. The largest city in the Company’s New Mexico service territory is Las Cruces.

Deregulation . In March 2001, the New Mexico Legislature amended the New Mexico Restructuring Law to postpone deregulation in New Mexico until January 1, 2007, and to prohibit the separation of a utility’s transmission and distribution activities from its existing generation activities prior to September 1, 2005. The amended New Mexico Restructuring Law permits utilities to form holding companies subject to New Mexico approval with conditions. It also allows the utility, until corporate separation occurs, to participate in unregulated generation activities if the generation is not intended to serve New Mexico retail customers.

The amended New Mexico Restructuring Law prohibiting the separation of the Company’s generation activities from its transmission and distribution activities prior to September 1, 2005 may conflict with the Texas Restructuring Law requiring separation of those activities after the expiration of the Freeze Period in August 2005. Accordingly, the Company is currently evaluating possible benefits, if any, of forming a holding company prior to 2005. The Company anticipates that it will seek

New Mexico Commission approval to separate the Company’s generation activities from its transmission and distribution activities in either 2004 or 2005 to allow the Company to restructure at the earliest time allowable.

The amended New Mexico law required the New Mexico Commission to approve previously filed applications to form holding companies to the extent that the applications do not conflict with the provisions of the law as amended and are otherwise in the public interest. Accordingly, in early April 2001, the Company filed its suggested amendments to its previously filed proposed corporate restructuring plan. The filing sought to conform the Company’s proposal with the requirements under the amended law which requires the regulated utility to continue to own all regulated generation currently owned and operated by the utility. On June 28, 2001, the New Mexico Commission issued its order approving formation of a holding company for the Company, but also placing thirty-eight conditions upon its approval. The conditions included numerous reporting and compliance requirements as well as strict prohibitions on certain intercompany activity. The Company sought rehearing on the order, which was denied without action by the Commission. The Company filed an appeal with the New Mexico Supreme Court on September 15, 2001. After reviewing the Company’s options in light of the Commission’s holding company order, the Company determined it was in its best interest to withdraw its request for a holding company and request that the Commission vacate the order. The Company, the New Mexico Commission and the Attorney General filed a joint motion asking the Court to dismiss the appeal so the Commission could vacate the order and allow the Company to withdraw its application. The Court dismissed the appeal on October 10, 2001, and the Commission vacated the order on December 18, 2001. Thus, the Company is no longer subject to the holding company conditions. The Company may request approval of a holding company at a later date, if and when needed, subject to whatever legal requirements are in effect at that time.

The New Mexico Restructuring Law allows the Company to recover reasonable, prudent and unmitigated costs that the Company would not have incurred but for its compliance with the New Mexico Restructuring Law. The March 2001 amendment to the New Mexico Restructuring Law did not address the recovery of transition costs spent to date. The Company cannot predict whether and to what extent the New Mexico Commission will allow the Company to recover these transition costs during the five year delay. Such costs, to the extent they are not capitalizable as fixed assets, are expensed as incurred.

Fuel. The New Mexico Settlement Agreement entered into in October 1998 eliminated the then existing fuel factor of $0.01949 per kWh incorporating it into frozen base rates. Accordingly, the Company was required to absorb any increases in fuel and purchased power (“energy”) expenses related to its New Mexico retail customers until new rates were implemented subsequent to the end of the rate freeze on April 30, 2001. The average energy costs incurred for New Mexico jurisdictional customers exceeded this fuel factor by a substantial amount. Therefore, on April 23, 2001, the Company filed a petition with the New Mexico Commission proposing a settlement that would implement a new fixed fuel factor and reinstate for a two-year period a fuel adjustment clause in lieu of a base rate increase (the “New Mexico Fuel Factor Agreement”). The New Mexico Commission allowed the Company to implement its New Mexico Fuel Factor Agreement on an interim basis, beginning on June 15, 2001, subject to final approval of the New Mexico Commission. The New Mexico Commission entered its final order on January 8, 2002, setting a fixed fuel factor of $0.01501 per kWh designed to increase revenues by approximately $19 million annually. The reinstatement of a fuel adjustment clause substantially mitigates the financial risk to the Company of any further energy cost increases over the two-year period of the agreement.

Due to the decrease in gas prices since mid-2001, on February 12, 2002, the Company filed a petition with the New Mexico Commission for a fuel factor decrease to $0.00420 per kWh. The New Mexico Commission issued an order approving that decrease on February 19, 2002. Under current projections the Company’s new fuel factor will decrease fuel revenue collections by approximately $15.5 million in 2002.

Federal Regulatory Matters

Federal Energy Regulatory Commission. The Company is subject to regulation by the FERC in certain matters, including rates for wholesale power sales, transmission of electric power and the issuance of securities.

Fuel . Under FERC regulations, the Company’s fuel factor is adjusted monthly for almost all FERC jurisdictional customers. Accordingly, any increase or decrease in energy expenses immediately flows through to such customers.

RTOs . On December 15, 1999, the FERC approved its final rule (“Order 2000”) on Regional Transmission Organizations (“RTOs”). Order 2000 strongly encourages, but does not require, public utilities to form and join RTOs. Order 2000 also proposes RTO startup by December 15, 2001. The Company is an active participant in the development of WestConnect, formerly known as the Desert Southwest Transmission and Reliability Operator. The Company believes WestConnect will qualify as an RTO under Order 2000. The Company intends, subject to the resolution of outstanding issues, to participate in WestConnect. As a participating transmission owner, the Company will transfer operations of its transmission system to WestConnect. The WestConnect proposal was submitted to the FERC on October 15, 2000. On March 1, 2001, the WestConnect proposal was updated to inform the FERC that the start of WestConnect operations would be delayed. WestConnect currently is scheduled to become operational by January 1, 2003. If WestConnect should fail to become operational, the Company would seek to participate in another RTO similar to WestConnect.

Department of Energy. The DOE regulates the Company’s exports of power to CFE in Mexico pursuant to a license granted by the DOE and a presidential permit. The DOE has determined that all such exports over international transmission lines shall be made in accordance with Order No. 888, which established the FERC rules for open access. The DOE is authorized to assess operators of nuclear generating facilities a share of the costs of decommissioning the DOE’s uranium enrichment facilities and for the ultimate costs of disposal of spent nuclear fuel. See “Facilities – Palo Verde Station – Spent Fuel Storage” for discussion of spent fuel storage and disposal costs.

Nuclear Regulatory Commission . The NRC has jurisdiction over the Company’s licenses for Palo Verde and regulates the operation of nuclear generating stations to protect the health and safety of the public from radiation hazards. The NRC also has the authority to conduct environmental reviews pursuant to the National Environmental Policy Act.

Sales for Resale

During 2001, the Company provided IID with 100 MW of firm capacity and associated energy and 50 MW of system contingent capacity and associated energy pursuant to a 17–year agreement which expires on April 30, 2002. The Company also provided TNP in 2001 with up to 25 MW of firm

capacity and associated energy pursuant to an agreement that expires on December 31, 2002. The contract allows TNP to specify a maximum annual amount up to 75 MW with one year’s notice. The Company received notice from TNP in December 2000 that TNP was electing to take 75 MW in 2002. The Company also sold 40 MW of firm capacity and associated energy to CFE during May 2001 and 100 MW during June through September 2001.

Power Sales Contracts

As of March 11, 2002, the Company had entered into the following agreements with various counterparties for forward firm sales of electricity:

Type of Contract	Quantity	Term
Off-peak	25 MW	2002
On-peak	60 MW	June through September 2002
Off-peak	25 MW	July, August, September, November and December 2002

The Company also has an agreement with a counterparty for power exchanges under which the Company will receive 80 MW of on-peak capacity and associated energy during 2002 at the Eddy County tie and concurrently deliver the same amount at Palo Verde and/or Four Corners. The on-peak exchange amount will decrease to 30 MW for 2003 through 2005. The agreement also gives the counterparty the option to deliver up to 133 MW of off-peak capacity and associated energy to the Company at the Eddy County tie from 2002 through 2005 in exchange for the same amount of energy concurrently delivered by the Company at Palo Verde and/or Four Corners. The Company will receive a guaranteed margin on any energy exchanged under the off-peak agreement. See “Purchased Power.”

Executive Officers of the Registrant

The executive officers of the Company as of March 11, 2002, were as follows:


Name	Age	Current Position and Business Experience
Gary R. Hedrick	47	Chief Executive Officer, President and Director since November 2001; Executive Vice President, Chief Financial and Administrative Officer from August 2000 to November 2001; Vice President, Chief Financial Officer and Treasurer from August 1996 to August 2000.
Terry Bassham	41	Executive Vice President, Chief Financial and Administrative Officer since November 2001; Executive Vice President and General Counsel from August 2000 to November 2001; Vice President and General Counsel from January 1999 to August 2000; General Counsel since August 1996.
J. Frank Bates	51	Executive Vice President and Chief Operations Officer since November 2001; Vice President – Transmission and Distribution from August 1996 to November 2001.
Raul A. Carrillo, Jr.	40	General Counsel since January 2002; Shareholder with Sandenaw, Carrillo & Piazza, P.C. from March 1996 to January 2002.
Kathryn R. Hood	48	Treasurer since October 2000; Assistant Treasurer from April 1999 to October 2000; Manager of Financial Services from March 1991 to April 1999.
Helen Knopp	59	Vice President – Customer and Public Affairs since April 1999; Executive Director of the Rio Grande Girl Scout Council from September 1991 to April 1999.
Kerry B. Lore	42	Controller since October 2000; Assistant Controller from April 1999 to October 2000; Manager of Accounting Services from July 1993 to April 1999.
Robert C. McNiel	55	Vice President – New Mexico Affairs since December 1997; Vice President – Public Affairs and Marketing from August 1996 to December 1997.
Hector R. Puente	53	Vice President – Power Generation since April 2001; Manager – Substations and Relaying from August 1996 to April 2001.
Guillermo Silva, Jr.	48	Secretary since January 1994.

The executive officers of the Company are elected annually and serve at the discretion of the Board of Directors.

Item 2. Properties

The principal properties of the Company are described in Item 1, “Business,” and such descriptions are incorporated herein by reference. Transmission lines are located either on private rights–of–way, easements or on streets or highways by public consent. See Part II, Item 8, “Financial Statements and Supplementary Data – Note F of Notes to Consolidated Financial Statements” for information regarding encumbrances against the principal properties of the Company.

In addition, the Company leases executive and administrative offices in El Paso, Texas. See Part II, Item 8, “Financial Statements and Supplementary Data – Note H of Notes to Consolidated Financial Statements” for information regarding the leased property.

Item 3. Legal Proceedings

The Company is a party to various legal actions. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. Based upon a review of these claims and applicable insurance coverage, the Company believes that none of these claims will have a material adverse effect on the financial position, results of operations and cash flows of the Company.

The Company’s federal income tax returns for the years 1996 through 1998 have been examined by the IRS. On October 3, 2001, the Company received the IRS notice of proposed deficiency. The primary audit adjustments proposed by the IRS related to (i) whether the Company was entitled to deduct payments made on emergence from Chapter 11 bankruptcy proceedings related to Palo Verde and (ii) the settlement of litigation in 1997 concerning a terminated merger during the Company’s bankruptcy. The Company has protested the audit adjustments through administrative appeals and believes that its treatment of the payments is supported by substantial legal authority. In the event that the IRS prevails, the resulting income tax and interest payments could be material to the Company’s financial position, results of operations and cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s common stock trades on the American Stock Exchange under the symbol “EE.” On September 25, 2000, the Company’s stock began trading in decimals in compliance with the Securities and Exchange Commission requirement that equity and option markets convert to decimal pricing systems. The high, low and close sales prices for the Company’s common stock, as reported in the consolidated reporting system of the American Stock Exchange, for the periods indicated below, were as follows:

	Sales Price
	High		Low		Close
					(End of period)
2000
First Quarter	$	10.44	$	8.13	$	10.38
Second Quarter		12.00		10.00		11.19
Third Quarter		15.50		10.88		13.77
Fourth Quarter		14.05		11.25		13.20
2001
First Quarter	$	14.60	$	10.97	$	14.60
Second Quarter		16.45		12.65		15.99
Third Quarter		16.13		13.01		13.15
Fourth Quarter		15.05		12.25		14.50

As of March 11, 2002, there were 4,993 holders of record of the Company’s common stock. The Company does not anticipate paying dividends on its common stock in the near–term. The Company intends to continue its deleveraging and stock repurchase programs with the goal of improving its capital structure.

The Company’s Board of Directors previously approved two stock repurchase programs allowing the Company to purchase up to twelve million of its outstanding shares of common stock. On February 7, 2002, the Company’s Board of Directors approved a third stock repurchase program allowing the Company to purchase up to three million shares of common stock. As of March 11, 2002, the Company had repurchased 11,921,329 shares of common stock under these programs for approximately $133.9 million, including commissions. The Company expects to continue to make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. Any repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired.

Item 6. Selected Financial Data

As of and for the following periods (in thousands except for share data):

	Years Ended December 31,
	2001			2000			1999			1998		1997
Operating revenues	$	769,705		$	701,649		$	570,469		$	601,823	$	592,021
Operating income		167,602			168,974			157,336			159,717		159,636
Income before extraordinary item		65,878			60,164			43,809			57,073		54,568
Extraordinary gain (loss) on extinguishments of debt, net of income tax (expense) benefit		(2,219	)		(1,772	)		(3,336	)		3,343		(2,775	)
Net income applicable to common stock		63,659			58,392			28,276			45,709		38,649
Basic earnings per common share:
Income before extraordinary item		1.30			1.11			0.53			0.70		0.69
Extraordinary gain (loss) on extinguishmentsof debt, net of income tax (expense) benefit		(0.05	)		(0.03	)		(0.05	)		0.06		(0.05	)
Net income		1.25			1.08			0.48			0.76		0.64
Weighted average number of commonshares outstanding		50,821,140			54,183,915			59,349,468			60,168,234		60,128,505
Diluted earnings per common share:
Income before extraordinary item		1.27			1.09			0.53			0.70		0.69
Extraordinary gain (loss) on extinguishmentsof debt, net of income tax (expense) benefit		(0.04	)		(0.03	)		(0.06	)		0.05		(0.05	)
Net income		1.23			1.06			0.47			0.75		0.64
Weighted average number of common shares and dilutive potential common shares outstanding		51,722,351			55,001,625			59,731,649			60,633,298		60,437,632
Cash additions to utility property, plant and equipment		70,739			64,612			51,826			49,409		46,467
Total assets		1,644,439			1,660,105			1,664,436			1,928,371		1,866,485
Long-term debt and financing and capital lease obligations		619,365			740,223			811,607			897,062		966,810
Preferred stock		—			—			—			135,744		121,319
Common stock equity		450,193			412,034			421,258			417,278		369,640

The selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, as well as other oral and written forward-looking statements made by or on behalf of the Company from time to time, including statements contained in the Company’s filings with the Securities and Exchange Commission and its reports to shareholders, involve known and unknown risks and other factors which may cause the Company’s actual results in future periods to differ materially from those expressed in any forward-looking statements. Factors that could cause or contribute to such differences included, but are not limited to: (i) increased prices for fuel and purchased power, (ii) the possibility that regulators may not permit the Company to pass through all such increased costs to customers, (iii) fluctuations in wholesale margins due to uncertainty in the wholesale power market, (iv) unanticipated increased costs associated with scheduled and unscheduled outages, (v) the cost of replacing steam generators and other unexpected costs at Palo Verde and (vi) other factors discussed below under the headings “Summary of Critical Accounting Policies and Estimates,” “Overview” and “Liquidity and Capital Resources.” The Company’s filings are available from the Securities and Exchange Commission or may be obtained upon request from the Company. Any such forward-looking statement is qualified by reference to these risks and factors. The Company cautions that these risks and factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company except as required by law.

Summary of Critical Accounting Policies and Estimates

Note A to the Consolidated Financial Statements contains a summary of the significant accounting policies that the Company uses. The preparation of these statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented and actual results could differ from those estimates. Critical accounting estimates, which are both important to the portrayal of the Company’s financial condition and results of operations and which require complex, subjective judgments, include the following:

Value of net utility plant in service

Decommissioning costs

Collection of fuel expense

Future pension and other postretirement obligations

Reserves for tax dispute

Value of Net Utility Plant in Service

In 1996, when it emerged from bankruptcy, the Company recast its financial statements by applying fresh-start reporting in accordance with Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” In this process, the Company attributed value to its integrated utility system, including its generation assets, after it had established the value of its pro forma capital structure based on management’s estimates of future operating results. The Company valued its generation assets such that the depreciated value of its generation assets would be approximately equal to their estimated fair value at the end of the Freeze Period. This is important

because at the beginning of retail competition in Texas and New Mexico, the Company will no longer be permitted to recover in rates any “stranded costs”, that is, the difference between the book value and the market value of its electric generation assets. If at any time the Company determines that estimated, undiscounted future net cash flows from the operations of the generation assets are not sufficient to recover their net book value then it will be required to write down the value of these assets to their fair values. Any such writedown would be charged to earnings. The Company currently believes that its rates are sufficient to fully collect before 2005 all costs that would otherwise be “stranded” under relevant laws in Texas and New Mexico and that future net cash flows after 2005 from the generating assets will be sufficient to recover their net book values.

Decommissioning Costs

Pursuant to the ANPP Participant Agreement and federal law, the Company must fund its share of the estimated costs to decommission Palo Verde Units 1, 2, and 3 and associated common areas. The Company and other Palo Verde Participants rely upon decommissioning cost studies and make interest rate, rate of return and inflation projections to determine funding requirements and estimate liabilities related to decommissioning. Every third year, outside engineers perform a study to estimate decommissioning costs associated with Palo Verde Units 1, 2 and 3 and associated common areas. The Company funds its share of those estimated costs through professionally managed investment trust accounts. Management must make assumptions about future investment returns and future cost escalations in order to determine the amounts with which to fund the trusts. If actual decommissioning costs exceed estimates, the Company would incur additional expenses related to decommissioning. Further, if the rates of return earned by the trusts fail to meet expectations, the Company will be required to increase its funding to the decommissioning trust accounts. Although the Company cannot predict the results of future studies, the Company believes that the liability it has recorded for its decommissioning costs will be adequate to provide for the Company’s share of the costs. The Company believes that its current annual funding levels of the decommissioning trust will adequately provide for the cash requirements associated with decommissioning. Historically, regulated utilities such as the Company have been permitted to collect in rates the costs of nuclear decommissioning. Under deregulation legislation in both Texas and New Mexico, the Company expects to continue to be able to collect from customers the costs of decommissioning.

Collection of Fuel Expense

As a regulated entity, the Company’s fuel and purchased power expenses are passed through directly to its regulated customers. These costs are then subject to a prudency review of its fuel and purchased power costs by the Texas and New Mexico Commissions. In general, if the Texas and New Mexico Commissions find that the fuel and purchased power expenses were reasonably incurred, the Company may recover those expenses from its customers. Until those periodic reviews are completed, however, management must rely upon projections related to fuel and purchased power prices in order to estimate fuel revenues. When prices exceed management’s estimates, the Company undercollects fuel and purchased power expenses from its customers. The Company must then petition its regulators to reconcile its actual costs to actual revenues received from customers. Historically, regulators have allowed the Company to recover most of its fuel and purchased power-related expenses. If energy costs were deemed unreasonably incurred and regulators were to disallow recovery of these costs, however, the Company would incur a loss to the extent of the disallowance.

Future Pension and Other Postretirement Obligations

In accounting for its retirement plans and other postretirement benefits, the Company makes assumptions regarding the valuation of benefit obligations and the performance of plan assets. The accounting for retirement plans and other postretirement obligations allows for a smoothed recognition of changes in benefit obligations and plan performance over the service lives of the employees who benefit under the plans. The primary assumptions are discount rate, expected return on plan assets, rate of compensation increase and health care cost inflation. A change in any of these assumptions could have a significant impact on future costs, which may be reflected as an increase or decrease in net income in the period, or on the amount of related liabilities reflected on the Company’s consolidated balance sheet.

Reserves for Tax Dispute

The IRS has disputed whether the Company was entitled to deduct certain payments made in 1996 related to Palo Verde and its treatment of a litigation settlement in 1997 related to a terminated merger agreement. If the IRS prevails on the former issue, the Company would be required to include the previously deducted amounts in the tax basis of Palo Verde and deduct them over its useful life. This would not have a material impact on reported net income but would have a significant negative effect on the Company’s cash flow. An adverse resolution of the second issue would lead to the recognition of additional revenue in the Company’s tax return with no related tax benefits and could result in a material amount of additional tax. The Company has established, and periodically reviews and re–evaluates, an estimated contingent tax liability on its consolidated balance sheet to provide for the possibility of adverse outcomes in tax proceedings. Although the ultimate outcome cannot be predicted with certainty, and while the contingent tax reserve may not in fact be sufficient, the Company believes that the amount at December 31, 2001 adequately provides for any additional tax that may be due.

Overview

El Paso Electric Company is an electric utility that serves retail customers in west Texas and southern New Mexico and wholesale customers in Texas, New Mexico, California and Mexico. The Company owns or has substantial ownership interests in six electrical generating facilities providing it with a total capacity of approximately 1,500 MW. The Company’s energy sources consist of nuclear fuel, natural gas, coal, purchased power and wind. The Company owns or has significant ownership interests in four major 345 kV transmission lines and three 500 kV lines to provide power from Palo Verde and Four Corners, and owns the distribution network within its retail service territory. The Company is subject to extensive regulation by the Texas and New Mexico Commissions and, with respect to wholesale power sales, transmission of electric power and the issuance of securities, by the FERC.

The Company faces a number of risks and challenges that could negatively impact its operations and financial results. The most significant of these risks and challenges arise from the deregulation of the electric utility industry, the possibility of increased costs, especially from Palo Verde, and the Company’s high level of debt.

The electric utility industry in general and the Company in particular are facing significant challenges and increased competition as a result of changes in federal provisions relating to third-party transmission services and independent power production, as well as changes in state laws and regulatory

provisions relating to wholesale and retail service. In 1999, both Texas and New Mexico passed industry deregulation legislation requiring the Company to separate its transmission and distribution functions, which will remain regulated, from its power generation and energy services businesses, which will operate in a competitive market in the future. New Mexico subsequently amended its deregulation law to delay the implementation date. While the Company is not subject to deregulation in its Texas and New Mexico jurisdictions until 2005 and 2007, respectively, the potential effects of competition in the power generation and energy services markets remain important to the Company. There can be no assurance that the deregulation of the power generation market will not adversely affect the future operations, cash flows and financial condition of the Company.

The changing regulatory environment and the advent of unregulated power production have created a substantial risk that the Company will lose important customers. The Company’s wholesale and large retail customers already have, in varying degrees, additional alternate sources of economical power, including co-generation of electric power. Historically, the Company has lost certain large retail customers to self generation and/or co-generation and seen reductions in wholesale sales due to new sources of generation. American National Power, Inc., a wholly-owned subsidiary of International Power PLC, has announced it is exploring the possibility of building a generation plant in El Paso, Texas. Duke Energy has begun the initial phase of construction on a generation plant in Deming, New Mexico and has announced it is exploring the possibility of building a generation plant in Lordsburg, New Mexico. Public Service Company of New Mexico has begun the construction of a generation plant outside Las Cruces, New Mexico. If the Company loses a significant portion of its retail customer base or wholesale sales, the Company may not be able to replace such revenues through either the addition of new customers or an increase in rates to remaining customers.

Another risk to the Company is potential increased costs, including the risk of additional or unanticipated costs at Palo Verde resulting from (i) increases in operation and maintenance expenses; (ii) the replacement of steam generators; (iii) an extended outage of any of the Palo Verde units; (iv) increases in estimates of decommissioning costs; (v) the storage of radioactive waste, including spent nuclear fuel; (vi) insolvency of other Palo Verde Participants and (vii) compliance with the various requirements and regulations governing commercial nuclear generating stations. At the same time, the Company’s retail base rates in Texas are effectively capped through a rate freeze ending in August 2005. Additionally, upon initiation of competition, there will be competitive pressure on the Company’s power generation rates which could reduce its profitability. The Company also cannot assure that its revenues will be sufficient to recover any increased costs, including any increased costs in connection with Palo Verde or other operations, whether as a result of inflation, changes in tax laws or regulatory requirements, or other causes.

Under the Texas Commission rules and the Company’s energy cost recovery clauses (“fuel clauses”) in certain wholesale rates, energy costs are passed through to customers. However, energy costs were not passed through to the Company’s New Mexico customers prior to June 15, 2001. These energy costs were included in base rates and were not subject to periodic reconciliation or adjustment for fluctuations in such costs. From January 1, 2001 through June 15, 2001, the Company incurred increased energy expenses which were not recoverable from New Mexico and certain wholesale customers of approximately $3.1 million, net of tax, compared to the year ended December 31, 2000. The New Mexico Commission allowed the Company to implement its New Mexico Fuel Factor Agreement, beginning with consumption on June 15, 2001, subject to refund. The New Mexico Commission granted final approval on January 8, 2002. The reinstatement of a fuel adjustment clause substantially mitigates the financial risk to the Company of any further energy cost increases over the

two-year period of the agreement. See Part I, Item 1, “Business – Regulation – New Mexico Regulatory Matters – Fuel” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Commodity Price Risk.”

As of December 31, 2001, the Company had an immaterial outstanding net receivable of approximately $0.2 million from Enron related to prepetition claims for which the Company has provided an allowance in its general allowance for bad debts. The Company is party to a power purchase contract with Enron requiring deliveries of electricity to the Company during 2002. If Enron fails to perform under this contract, the Company believes that it will be able to obtain replacement power at prices lower than those payable to Enron under the contract.

Liquidity and Capital Resources

The Company’s principal liquidity requirements in the near-term are expected to consist of interest and principal payments on the Company’s indebtedness and capital expenditures related to the Company’s generating facilities and transmission and distribution systems. The Company expects that cash flows from operations will be sufficient for such purposes.

Long-term capital requirements of the Company will consist primarily of construction of electric utility plant and payment of interest on and retirement of debt. Utility construction expenditures will consist primarily of expanding and updating the transmission and distribution systems, possible addition of new generation, and the cost of capital improvements and replacements at Palo Verde and other generating facilities, including the replacement of the Palo Verde steam generators. See Part I, Item 1, “Business – Construction Program.”

During 2001, 2000 and 1999, the Company utilized $128.0 million, $93.6 million and $97.8 million, respectively, of federal tax loss carryforwards. The Company anticipates that existing federal tax loss carryforwards will be fully utilized in 2003 and after that date the Company’s cash flow requirements are expected to include greater amounts of cash paid for income taxes than has existed in recent years.

At December 31, 2001, the Company had approximately $28.0 million in cash and cash equivalents, an increase of $16.7 million from the December 31, 2000 balance of $11.3 million. The Company also has a $100 million revolving credit facility, which provides up to $70 million for nuclear fuel purchases. Any amounts not borrowed for nuclear fuel purchases may be borrowed by the Company for working capital needs. In January 2002, the revolving credit facility was renewed for a three-year term. At December 31, 2001, approximately $48.3 million had been drawn for nuclear fuel purchases. No amounts are currently outstanding on this facility for working capital needs.

The Company has a high debt to capitalization ratio and significant debt service obligations. Due to the Texas Rate Stipulation, the Texas Settlement Agreement, and competitive pressures, the Company does not expect to be able to raise its base rates in Texas in the event of increases in non-fuel costs or loss of revenues. See Part I, Item 1, “Business – Regulation – Texas Regulatory Matters.” Accordingly, as described below, debt reduction continues to be a high priority for the Company in order to gain additional financial flexibility to address the evolving competitive market.

The Company has significantly reduced its long-term debt since its emergence from bankruptcy in 1996. From June 1, 1996 through March 11, 2002, the Company repurchased approximately $431.3 million of first mortgage bonds with internally generated cash as part of a deleveraging program

and repaid the remaining $36.0 million and $34.6 million of Series A and Series B First Mortgage Bonds at their maturity in February 1999 and May 2001, respectively, which has combined to reduce the Company’s annual interest expense by approximately $40.6 million. The Company also redeemed its 11.40% Series A Preferred Stock in March 1999, which resulted in the avoidance of approximately $15.9 million in annual cash dividends that would have been payable until mandatory redemption in 2008. Common stock equity as a percentage of capitalization, including current maturities of long-term debt, has increased from 19% at June 30, 1996 to 39% at December 31, 2001. In addition, the Company’s bonds are rated investment grade by all three major credit rating agencies.

The Company continues to believe that the orderly reduction of debt with a goal of achieving a capital structure that is more typical in the electric utility industry is a significant component of long-term shareholder value creation. Accordingly, the Company will regularly evaluate market conditions and, when appropriate, use a portion of its available cash to reduce its fixed obligations through open market purchases of first mortgage bonds.

The degree to which the Company is leveraged could have important consequences on the Company’s liquidity, including (i) the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate or other purposes could be limited in the future and (ii) the Company’s higher than average leverage may place the Company at a competitive disadvantage by limiting its financial flexibility to respond to the demands of the competitive market and make it more vulnerable to adverse economic or business changes.

Historical Results of Operations

	Years Ended December 31,
	2001		2000		1999
Net income applicable to common stock before extraordinary item (in thousands)	$	65,878	$	60,164	$	31,612
Diluted earnings per common share before extraordinary item		1.27		1.09		0.53

Electric utility operating revenues net of energy expenses increased $7.8 million in 2001 compared to 2000 and $17.1 million in 2000 compared to 1999, primarily due to changes in the following (in thousands):

Years Ended December 31:	2001			2000
Increased retail kWh sales	$	8,182		$	22,707
Increased economy sales margins		9,089			20,365
Increased CFE kWh sales		2,558			1,756
Energy expenses not recovered in the
New Mexico service area prior to July 2001		(5,019	)		(11,344	)
Sales tax refund in 2000		(2,982	)		1,797	(1)
Change in sales mix		(2,383	)		(3,349	)
Coal mine reclamation adjustment		–			(6,601	)(2)
Texas Settlement Agreement:
Palo Verde performance reward		–			(3,453	)
Retroactive base rate decrease		–			2,343
Change in estimated fuel cost reserves		–			(3,754	)
Other		(1,601	)		(3,404	)

	$	7,844		$	17,063

(1)

A sales tax refund of $1.8 million was received in 2000 and based on a related negotiated settlement in 2001, $1.2 million was credited to the Texas jurisdictional customers through the fuel adjustment clause.

(2)

Represents an adjustment in December 1999 reducing fuel expense based on a reduction of the Company’s estimated coal mine reclamation liability.

Comparisons of kWh sales and electric utility operating revenues are shown below (in thousands):

						Increase/(Decrease)
Years Ended December 31:	2001		2000			Amount			Percent
Electric kWh sales:
Retail		6,218,472		6,114,742			103,730		1.7	%
Sales for resale		1,460,383		1,282,540			177,843		13.9		(1	)
Economy sales		929,914		1,714,288			(784,374	)	(45.8	)	(2	)

Total		8,608,769		9,111,570			(502,801	)	(5.5	)

Electric utility operating revenues:
Retail	$	566,047	$	530,308		$	35,739		6.7	%	(3	)
Sales for resale		86,443		70,162			16,281		23.2		(4	)
Economy sales		92,452		84,918			7,534		8.9		(5	)
Other (6)		9,582		11,020			(1,438	)	(13.0	)	(7	)

Total	$	754,524	$	696,408		$	58,116		8.3


						Increase/(Decrease)
Years Ended December 31:	2000		1999			Amount			Percent
Electric kWh sales:
Retail		6,114,742		5,866,168			248,574		4.2	%
Sales for resale		1,282,540		905,975			376,565		41.6		(8	)
Economy sales		1,714,288		1,497,880			216,408		14.4		(9	)

Total		9,111,570		8,270,023			841,547		10.2

Electric utility operating revenues:
Retail	$	530,308	$	480,338	(10)	$	49,970		10.4	%	(11	)
Sales for resale		70,162		49,441			20,721		41.9		(4	)
Economy sales		84,918		32,523			52,395		161.1		(9	)
Other (6)		11,020		6,076			4,944		81.4		(12	)

Total	$	696,408	$	568,378		$	128,030		22.5

(1)

Primarily due to increased kWh sales to CFE and IID.

(2)

Primarily due to a weaker power market in the last half of 2001.

(3)

Primarily due to increased energy expenses that are passed through directly to Texas and New Mexico (beginning June 15, 2001) jurisdictional customers.

(4)

Primarily due to (i) increased energy expenses that are passed through directly to certain wholesale customers and (ii) increased sales to CFE.

(5)

Primarily due to (i) increased margins on economy sales and (ii) higher average prices as a result of increased energy expenses. These increases were partially offset by decreased kWh sales.

(6)

Represents revenues with no related kWh sales.

(7)

2000 includes margins on energy swaps of $4.3 million with no comparable activity in 2001. In early 2000, the Company entered into several power purchase contracts for the summer months to ensure there would be sufficient power available to meet increased customer demand. For at least two of these contracts, the Company agreed to pay market-based index prices rather than fixed prices. As power prices began to escalate in the second quarter of 2000, the Company entered into two financial swap agreements in which the Company agreed to pay fixed prices and the counterparty agreed to pay market-based prices for the notional amounts of kWh in the swap agreements. Market prices continued to escalate over the summer of 2000 and, under the swap agreement, the Company received the difference between the fixed prices and the higher market index prices on the notional kWh amounts.

(8)

Primarily due to (i) increased kWh sales to IID and (ii) sales to CFE as a result of a contract that was effective from June through August 2000 with no comparable sales to CFE in 1999.

(9)

In order to ensure sufficient availability of purchased power during the summer of 2000, the Company entered into a firm purchased power contract in January 2000 that was effective through the end of the year. The increase in economy kWh sales is primarily due to the sale of power purchased under this contract that was not needed to serve native load and wholesale contracts during the non-summer

months. The increase in economy sales revenue was primarily due to (i) increased margins, (ii) increased prices as a result of increased energy expenses and (iii) increased kWh sales.

(10)

Includes the effects of the Texas Settlement Agreement and change in estimated fuel cost reserves of $4.9 million.

(11)

Primarily due to (i) increased energy expenses that are passed through directly to Texas jurisdictional customers and (ii) increased kWh sales.

(12)

Primarily due to energy swaps described in (7) above.

Other electric utility operations and maintenance expense increased $8.5 million and $7.2 million in 2001 compared to 2000 and in 2000 compared to 1999, respectively, as follows (in thousands):

Years Ended December 31:	2001		2000		Increase/(Decrease)
Maintenance expense at generation plants	$	35,160	$	31,377	$	3,783	(1)
Pensions and benefits expense		26,424		23,606		2,818	(2)
Operations expense at generation plants		35,793		33,990		1,803
Customer accounts		11,310		10,057		1,253
Outside services expense		5,023		8,731		(3,708	)(3)
Other		68,179		65,672		2,507

Total other operations and maintenance expense	$	181,889	$	173,433	$	8,456


Years Ended December 31:	2000		1999		Increase/(Decrease)
Maintenance expense at generation plants	$	31,377	$	27,501	$	3,876	(4)
Corporate restructuring legal fees		1,305		–		1,305
Maintenance of general plant		3,698		2,603		1,095	(5)
Pensions and benefits expense		23,606		24,869		(1,263	)(6)
Other		113,447		111,230		2,217

Total other operations and maintenance expense	$	173,433	$	166,203	$	7,230

(1)

Primarily due to scheduled maintenance outages in 2001.

(2)

Primarily due to an increase in OPEB costs resulting from a change in discount rate and escalation assumptions for medical costs for 2001.

(3)

Primarily due to a decrease in consulting fees and corporate restructuring expenses.

(4)

Primarily due to (i) an insurance claim receivable recognized in 1999 for expenses of a major overhaul of gas turbines at a local plant that were recognized in prior periods and (ii) unscheduled maintenance due to a mechanical problem with a turbine shaft in 2000.

(5)

Primarily due to increased expenses for (i) a one-time environmental assessment of $0.3 million spent to perform a storm water study at Company-owned generating plants and (ii) new maintenance agreements on computer equipment.

(6)

Primarily due to (i) the 1999 reversal of a receivable related to anticipated refunds on medical payments and (ii) increased medical expenses in 1999 with no comparable activity in 2000.

Depreciation and amortization expense increased $0.8 million in 2001 compared to 2000 primarily due to an increase in depreciable plant balances. The decrease of $4.0 million in 2000 compared to 1999 was primarily due to a change in the estimated depreciable life of the plant investment related to the decommissioning of Palo Verde from 10 to 27.25 years, based on the license expiration date of Unit 3. The Texas Restructuring Law permitted recovery of nuclear decommissioning costs over the service lives of the relevant nuclear plants. Depreciation rates for the

Texas jurisdictional portion of the plant investment ($59 million) were adjusted to reflect the increased service life. The New Mexico jurisdictional portion of the plant investment ($17 million) continues to be depreciated over 10 years. This shorter service life is based on the uncertainty of recovering all decommissioning costs under the New Mexico restructuring legislation. For all other utility plants, Texas and New Mexico depreciation lives are the same.

Taxes other than income taxes remained relatively unchanged in 2001 compared to 2000. Taxes other than income taxes increased $1.7 million in 2000 compared to 1999 primarily due to (i) a $3.1 million reversal in 1999 of sales tax reserves established in prior years with no comparable amount in 2000 and (ii) an increase in Texas revenue related to taxes due to higher operating income in 2000. These increases were partially offset by a $1.7 million decrease in Arizona property taxes as a result of depreciation and a regulatory basis plant write-down pursuant to the New Mexico Settlement Agreement.

Other income (deductions) decreased $0.3 million in 2001 compared to 2000 primarily due to a decrease of $2.4 million of investment income related to the decommissioning trust fund and the IID contract receivable. These decreases were partially offset by an increase of $1.6 million in interest income on the undercollection of Texas fuel revenues and a $0.5 million insurance reimbursement recognized in 2001 for a loss expensed in a prior period. The increase of $8.0 million in 2000 compared to 1999 was primarily due to the accrual in 1999 of $16.5 million to be paid under the settlement agreement with Las Cruces. This increase was partially offset by (i) a decrease in investment income of $3.4 million resulting from the investment of lower levels of cash; (ii) a 1999 adjustment of $1.7 million to the cash value of Company–owned life insurance policies and (iii) a gain realized on the disposition of non–utility property of $2.4 million in 1999 with no comparable activity in 2000.

Interest charges decreased $4.9 million in 2001 compared to 2000 primarily due to (i) a reduction in outstanding debt as a result of open market purchases of the Company’s first mortgage bonds; (ii) increased capitalized interest related to construction work in progress and (iii) decreased interest rates. These decreases were partially offset by an increase of $1.6 million in interest expense resulting from the remarketing of the pollution control bonds. The decrease of $10.0 million in 2000 compared to 1999 was primarily due to (i) a reduction in outstanding debt as a result of open market purchases of the Company’s first mortgage bonds and (ii) adjustments to postload nuclear fuel to write-off a portion of accumulated interest capitalized prior to 1999 and discontinue capitalizing interest thereon in 1999.

Income tax expense, excluding the tax effect of extraordinary items, decreased $2.5 million in 2001 compared to 2000 primarily due to changes in pretax income and certain permanent differences and adjustments including (i) a reduction to the Company’s estimated contingent federal tax liabilities based upon discussions and agreed issues with taxing authorities related to the IRS examination of the Company’s 1996 through 1998 tax returns and (ii) deductions taken for abandoned transition costs. The increase of $13.3 million in 2000 compared to 1999 was primarily due to changes in pretax income and certain permanent differences including (i) an increase in nondeductible transition costs; (ii) a decrease in the adjustment to the cash value of Company-owned life insurance policies and (iii) a decrease in tax-exempt income.

Extraordinary loss on extinguishments of debt, net of income tax benefit, represents the payment of premiums on debt extinguishments and the recognition of unamortized issuance expenses on that debt.

For the last several years, inflation has been relatively low and, therefore, has had little impact on the Company’s results of operations and financial condition.

In July 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company does not believe that its activities or assets as of December 31, 2001 will be impacted by these standards.

Additionally, in July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 provides accounting guidance for retirement obligations, for which there is a legal obligation to settle, associated with tangible long-lived assets. SFAS No. 143 requires that asset retirement costs be capitalized as part of the cost of the related long-lived asset and such costs should be allocated to expense by using a systematic and rational method. SFAS No. 143 requires the initial measurement of the asset retirement obligation liability to be recorded at fair value and the use of an allocation approach for subsequent changes in the measurement of the liability. Upon adoption of SFAS No. 143, an entity will use a cumulative-effect adjustment to recognize transition amounts for any existing asset retirement obligation liability, asset retirement costs and accumulated depreciation. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management has not yet quantified the impact of adopting SFAS No. 143 on the Company’s financial statements.

On October 3, 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). While SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” it retains many of the fundamental provisions of that standard. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not believe that its assets as of December 31, 2001, will be impacted by this standard.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The following discussion regarding the Company’s market-risk sensitive instruments contains forward-looking information involving risks and uncertainties. The statements regarding potential gains and losses are only estimates of what could occur in the future. Actual future results may differ materially from those estimates presented due to the characteristics of the risks and uncertainties involved.

The Company is exposed to market risk due to changes in interest rates, equity prices and commodity prices. Substantially all financial instruments and positions held by the Company described below are held for purposes other than trading.

Interest Rate Risk

The Company’s long-term debt obligations are all fixed-rate obligations with varying maturities, except for its revolving credit facility, which provides for nuclear fuel financing and working capital, and is based on floating rates. Interest rate risk, if any, related to the revolving credit facility is substantially mitigated through the operation of the Texas and New Mexico Commission rules and the Company’s energy cost recovery clauses (“fuel clauses”) in certain wholesale rates. Under these rules and fuel clauses, energy costs, including interest expense on nuclear fuel financing, are passed through to customers. Currently, the Company does not have a plan to issue additional long-term debt within the

next five years, although it anticipates remarketing its pollution control bonds, a portion in 2002 and a portion in 2005.

The Company’s decommissioning trust funds consist of equity securities and fixed income instruments and are carried at market value. The Company faces interest rate risk on the fixed income instruments, which consist primarily of municipal, federal and corporate bonds and which were valued at $26.0 million and $27.6 million as of December 31, 2001 and 2000, respectively. A hypothetical 10% increase in interest rates would reduce the fair values of these funds by $0.5 million and $0.6 million based on their fair values at December 31, 2001 and 2000, respectively.

Equity Price Risk

The Company’s decommissioning trust funds include marketable equity securities of approximately $34.9 million and $32.6 million at December 31, 2001 and 2000, respectively. A hypothetical 20% decrease in equity prices would reduce the fair values of these funds by $7.0 million and $6.5 million based on their fair values at December 31, 2001 and 2000, respectively.

Commodity Price Risk

The Company utilizes contracts of various durations for the purchase of natural gas, uranium concentrates and coal to effectively manage its available fuel portfolio. These agreements contain fixed and variable pricing provisions and are settled by physical delivery. The fuel contracts with variable pricing provisions, as well as substantially all of the Company’s purchased power requirements, are exposed to fluctuations in prices due to unpredictable factors, including weather, which impact supply and demand. However, the Company’s exposure to fuel and purchased power price risk is substantially mitigated through the operation of the Texas and New Mexico Commission rules and the Company’s fuel clauses, as discussed previously.

Natural gas and purchased power prices increased significantly from May 2000 through May 2001. Prior to July 2001, energy costs were included in frozen base rates for New Mexico and certain wholesale customers. During the first half of 2001, the Company’s average energy costs incurred for, but not recovered from, these customers substantially exceeded the energy costs that were incorporated into the applicable base rates. See Part I, Item 1, “Business – Regulation – New Mexico Regulatory Matters – Fuel” for further discussion. However, the Company has since entered into the New Mexico Fuel Factor Agreement, which allows the Company to pass energy costs through to its New Mexico customers. The implementation of the provisions of the agreement substantially mitigated the remaining financial risk to the Company of any further energy cost increases.

In the normal course of business, the Company utilizes contracts of various durations for the forward sales and purchases of electricity to effectively manage its available generating capacity and supply needs. Such contracts include forward contracts for the sale of generating capacity and energy during periods when the Company’s available power resources are expected to exceed the requirements of its native load and sales for resale. They also include forward contracts for the purchase of wholesale capacity and energy during periods when the market price of electricity is below the Company’s expected incremental power production costs or to supplement the Company’s generating capacity when demand is anticipated to exceed such capacity. As of March 11, 2002, the Company had entered into forward sales and purchase contracts for energy as discussed in Part I, Item 1, “Business – Energy Sources – Purchased Power” and “Regulation – Power Sales Contracts.” These agreements are

generally fixed-priced contracts which qualify for the “normal purchases and normal sales” exception provided in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and are not recorded at their fair value in the Company’s financial statements. Because of the operation of the Texas and New Mexico Commission rules and the Company’s fuel clauses, these contracts do not expose the Company to significant commodity price risk.

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

		Page
Independent Auditors’ Report		36
Consolidated Balance Sheets at December 31, 2001 and 2000		37
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999		39
Consolidated Statements of Comprehensive Operations for the years ended December 31, 2001, 2000 and 1999		40
Consolidated Statements of Changes in Common Stock Equity for the years ended December 31, 2001, 2000 and 1999		41
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999		42
Notes to Consolidated Financial Statements		43

INDEPENDENT AUDITORS’ REPORT

The Shareholders and Board of Directors

El Paso Electric Company

We have audited the accompanying consolidated balance sheets of El Paso Electric Company and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive operations, changes in common stock equity and cash flows for the years ended December 31, 2001, 2000 and 1999. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of El Paso Electric Company and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

El Paso, Texas

March 11, 2002

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS (In thousands)	December 31,
ASSETS (In thousands)	2001		2000
Utility plant:
Electric plant in service	$	1,708,908	$	1,659,539
Less accumulated depreciation and amortization		472,297		391,675

Net plant in service		1,236,611		1,267,864
Construction work in progress		86,802		67,976
Nuclear fuel; includes fuel in process of $11,356 and $10,430, respectively		74,004		75,880
Less accumulated amortization		33,177		36,289

Net nuclear fuel		40,827		39,591

Net utility plant		1,364,240		1,375,431

Current assets:
Cash and temporary investments		27,994		11,344
Accounts receivable, principally trade, net of allowance for doubtful accounts of $3,525 and $3,325, respectively		75,025		86,647
Accumulated deferred income taxes		39,299		44,523
Inventories, at cost		24,356		24,845
Net undercollection of fuel revenues		26,797		15,733
Prepayments and other		9,741		20,612

Total current assets		203,212		203,704

Deferred charges and other assets:
Decommissioning trust funds		60,901		60,176
Other		16,086		20,794

Total deferred charges and other assets		76,987		80,970

Total assets	$	1,644,439	$	1,660,105

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Continued)

CAPITALIZATION AND LIABILITIES (In thousands except for share data)	December 31,
	2001			2000
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 61,982,963 and 60,429,107 shares issued, and 267,334 and 276,066 restricted shares, respectively	$	62,250		$	60,705
Capital in excess of stated value		257,891			244,528
Unearned compensation – restricted stock awards		(2,041	)		(1,309	)
Retained earnings		265,775			202,116
Accumulated other comprehensive income, net of tax		752			2,902

		584,627			508,942
Treasury stock, 11,991,637 and 9,230,786, shares respectively; at cost		(134,434	)		(96,908	)

Common stock equity		450,193			412,034
Long-term debt		590,925			715,058
Financing obligations		28,440			25,165

Total capitalization		1,069,558			1,152,257

Current liabilities:
Current maturities of long-term debt and financing obligations		90,355			57,663
Accounts payable, principally trade		24,626			39,799
Taxes accrued other than federal income taxes		16,713			17,054
Interest accrued		16,860			16,528
Net overcollection of fuel revenues		3,265			–
Other		15,942			14,968

Total current liabilities		167,761			146,012

Deferred credits and other liabilities:
Decommissioning liability		137,614			128,129
Accrued postretirement benefit liability		84,974			81,784
Accumulated deferred income taxes		116,850			91,802
Accrued pension liability		30,694			31,134
Other		36,988			28,987

Total deferred credits and other liabilities		407,120			361,836


Commitments and contingencies

Total capitalization and liabilities	$	1,644,439		$	1,660,105

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except for share data)

	Years Ended December 31,
	2001			2000			1999
Electric utility operating revenues	$	754,524		$	696,408		$	568,378

Energy expenses:
Fuel		185,449			159,547			104,398
Coal mine reclamation adjustment		–			–			(6,601	)
Purchased and interchanged power		85,587			61,217			12,000

		271,036			220,764			109,797


Electric utility operating revenues net of energy expenses		483,488			475,644			458,581

Energy services operations:
Operating revenues		15,181			5,241			2,091
Operating expenses		15,936			6,670			3,006

		(755	)		(1,429	)		(915	)

Other electric utility operating expenses:
Other operations		135,880			131,768			130,017
Maintenance		46,009			41,665			36,186
Depreciation and amortization		89,462			88,654			92,628
Taxes other than income taxes		43,780			43,154			41,499

		315,131			305,241			300,330

Operating income		167,602			168,974			157,336

Other income (deductions):
Investment income		2,453			3,482			6,928
Litigation settlement		–			–			(16,500	)
Other, net		(1,576	)		(2,271	)		2,766

		877			1,211			(6,806	)

Income before interest charges		168,479			170,185			150,530

Interest charges (credits):
Interest on long-term debt and financing obligations		62,902			67,249			76,634
Other interest		7,998			7,632			7,697
Interest capitalized		(4,723	)		(3,756	)		(3,242	)

		66,177			71,125			81,089

Income before income taxes and extraordinary item		102,302			99,060			69,441
Income tax expense		36,424			38,896			25,632

Income before extraordinary item		65,878			60,164			43,809
Extraordinary loss on extinguishments of debt, net of income tax benefit		2,219			1,772			3,336

Net income		63,659			58,392			40,473
Preferred stock:
Dividend requirements		–			–			2,616
Redemption costs		–			–			9,581

Net income applicable to common stock	$	63,659		$	58,392		$	28,276

Basic earnings per common share:
Income before extraordinary item	$	1.30		$	1.11		$	0.53
Extraordinary loss on extinguishments of debt, net of income tax benefit		0.05			0.03			0.05

Net income	$	1.25		$	1.08		$	0.48

Diluted earnings per common share:
Income before extraordinary item	$	1.27		$	1.09		$	0.53
Extraordinary loss on extinguishments of debt, net of income tax benefit		0.04			0.03			0.06

Net income	$	1.23		$	1.06		$	0.47

Weighted average number of common shares outstanding		50,821,140			54,183,915			59,349,468

Weighted average number of common shares and dilutive potential common shares outstanding		51,722,351			55,001,625			59,731,649

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(In thousands)

	Years Ended December 31,
	2001			2000			1999
Net income	$	63,659		$	58,392		$	40,473
Other comprehensive income (loss):
Minimum pension liability adjustment		(824	)		–			–
Net unrealized gains (losses) on marketable securities:
Net holding gains (losses) arising during period		(5,611	)		(2,883	)		4,397
Reclassification adjustments for net losses included in net income		3,089			918			339

		(3,346	)		(1,965	)		4,736

Income tax benefit (expense) related to items of other comprehensive income (loss):
Minimum pension liability adjustment		313			–			–
Net unrealized gains (losses) on marketable securities		883			688			(1,658	)

		1,196			688			(1,658	)

Other comprehensive income (loss), net of tax		(2,150	)		(1,277	)		3,078

Comprehensive income		61,509			57,115			43,551
Preferred stock:
Dividend requirements		–			–			2,616
Redemption costs		–			–			9,581

Comprehensive income applicable to common stock	$	61,509		$	57,115		$	31,354

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

(In thousands except for share data)

	Common Stock
	Shares		Amount			Capital in Excess of Stated Value			Unearned Compensation – Restricted Stock Awards			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Common Stock Equity
Balances at December 31, 1998	60,270,362		$	60,270		$	241,325		$	(611	)	$	115,193		$	1,101		$	–		$	417,278
Grants of restricted common stock	210,744			211			1,505			(1,716	)											–
Amortization of unearned compensation										1,167												1,167
Stock awards withheld for taxes	(19,965	)		(20	)		(118	)														(138	)
Forfeitures of restricted common stock	(1,432	)		(1	)		(10	)		11												–
Preferred stock dividends													(2,616	)								(2,616	)
Preferred stock redemption													(9,581	)								(9,581	)
Capital stock adjustment													255									255
Net income													40,473									40,473
Other comprehensive income																3,078						3,078
Treasury stock acquired, 3,199,927 shares; at cost																			(28,658	)		(28,658	)

Balances at December 31, 1999	60,459,709			60,460			242,702			(1,149	)		143,724			4,179			(28,658	)		421,258
Grants of restricted common stock	177,269			177			1,584			(1,761	)											–
Stock issued upon exercise of options	93,955			94			406															500
Amortization of unearned compensation										1,601												1,601
Stock awards withheld for taxes	(25,760	)		(26	)		(164	)														(190	)
Net income													58,392									58,392
Other comprehensive loss																(1,277	)					(1,277	)
Treasury stock acquired, 6,030,859 shares; at cost																			(68,250	)		(68,250	)

Balances at December 31, 2000	60,705,173			60,705			244,528			(1,309	)		202,116			2,902			(96,908	)		412,034
Grants of restricted common stock	187,270			187			2,410			(2,597	)											–
Stock options exercised or remeasured	1,396,045			1,396			7,309															8,705
Amortization of unearned compensation										1,835												1,835
Stock awards withheld for taxes	(34,995	)		(35	)		(416	)														(451	)
Forfeitures of restricted common stock	(3,196	)		(3	)		(27	)		30												–
Deferred taxes on stock incentive plan							41															41
Realization of state income tax valuation allowance							4,046															4,046
Net income													63,659									63,659
Other comprehensive loss																(2,150	)					(2,150	)
Treasury stock acquired, 2,760,851 shares; at cost																			(37,526	)		(37,526	)

Balances at December 31, 2001	62,250,297		$	62,250		$	257,891		$	(2,041	)	$	265,775		$	752		$	(134,434	)	$	450,193

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended December 31,
	2001			2000			1999
Cash Flows From Operating Activities:
Net income	$	63,659		$	58,392		$	40,473
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of electric plant in service		89,462			88,654			92,628
Amortization of nuclear fuel		16,272			17,125			17,658
Deferred income taxes, net		33,070			36,590			23,490
Coal mine reclamation adjustment		–			–			(6,601	)
Extraordinary loss on extinguishments of debt,
net of income tax benefit		2,219			1,772			3,336
Amortization and accretion of interest costs		9,444			9,390			9,158
Other		2,323			1,593			5,282
Change in:
Accounts receivable		11,622			(24,611	)		2,699
Inventories		489			1,118			1,574
Net under/overcollection of fuel revenues		2,044			(18,373	)		8
Prepayments and other		10,871			(2,996	)		5,559
Accounts payable		(15,173	)		17,558			(8,894	)
Litigation settlement payable		–			(16,500	)		16,500
Taxes accrued other than federal income taxes		(341	)		(563	)		(2,699	)
Interest accrued		332			(494	)		(3,390	)
Other current liabilities		974			2,022			(3,833	)
Deferred charges and credits		6,312			5,830			(628	)

Net cash provided by operating activities		233,579			176,507			192,320

Cash Flows From Investing Activities:
Cash additions to utility property, plant and equipment		(70,739	)		(64,612	)		(51,826	)
Cash additions to nuclear fuel		(17,031	)		(16,502	)		(16,593	)
Interest capitalized:
Utility property, plant and equipment		(4,246	)		(3,078	)		(2,618	)
Nuclear fuel		(477	)		(678	)		(624	)
Investment in decommissioning trust fund		(3,246	)		(5,026	)		(5,656	)
Other investing activities		101			(182	)		(935	)

Net cash used for investing activities		(95,638	)		(90,078	)		(78,252	)

Cash Flows From Financing Activities:
Proceeds from exercise of stock options		8,275			–			–
Purchases of treasury stock		(37,526	)		(67,750	)		(28,658	)
Repurchases of and payments on long-term debt		(91,654	)		(40,651	)		(124,360	)
Nuclear fuel financing obligations:
Proceeds		19,468			19,943			19,907
Payments		(19,336	)		(20,077	)		(20,930	)
Redemption of preferred stock		–			–			(148,937	)
Preferred stock dividend payment		–			–			(1,328	)
Payments on capital lease obligations		–			(1,688	)		(1,540	)
Other financing activities		(518	)		(2,096	)		(138	)

Net cash used for financing activities		(121,291	)		(112,319	)		(305,984	)

Net increase (decrease) in cash and temporary investments		16,650			(25,890	)		(191,916	)
Cash and temporary investments at beginning of period		11,344			37,234			229,150

Cash and temporary investments at end of period	$	27,994		$	11,344		$	37,234

See accompanying notes to consolidated financial statements.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Summary of Significant Accounting Policies

General. El Paso Electric Company is a public utility engaged in the generation, transmission and distribution of electricity in an area of approximately 10,000 square miles in west Texas and southern New Mexico. El Paso Electric Company also serves wholesale customers in Texas, New Mexico, California and Mexico.

Principles of Consolidation. The consolidated financial statements include the accounts of El Paso Electric Company and its wholly-owned subsidiary, MiraSol Energy Services, Inc. (“MiraSol”) (collectively, the “Company”). MiraSol, which began operations as a separate subsidiary in March 2001, provides energy efficiency products and services previously provided by the Company’s Energy Services Business Group. All intercompany transactions and balances have been eliminated in consolidation. Additionally, the revenues and expenses of the former Energy Services Business Group have been reclassified for all periods presented in the accompanying consolidated statements of operations as energy services revenues and expenses.

Use of Estimates . The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Basis of Presentation . The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (the “FERC”). The Company determined that it does not meet the criteria for the application of Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of Certain Types of Regulation,” and accordingly does not report the effects of certain actions of regulators as assets or liabilities unless such actions result in assets or liabilities under generally accepted accounting principles for commercial enterprises in general.

Comprehensive Income. Certain gains and losses that are not recognized currently in the statements of operations are reported as other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income.”

Utility Plant . Depreciation is provided on a straight-line basis over the estimated remaining lives of the assets (ranging from 5 to 31 years), except for approximately $298 million of reorganization value allocated primarily to net transmission, distribution and general plant in service. This amount is being depreciated over the ten-year period of a rate settlement (the “Texas Rate Stipulation”). Based on a provision in the Texas Restructuring Law allowing recovery of nuclear decommissioning costs over the service lives of nuclear plants, as of January 1, 2000, the Company changed the estimated useful life of the plant investment of approximately $59 million for the Texas jurisdiction related to the decommissioning of Palo Verde. Previously, this decommissioning portion of Palo Verde plant costs had been depreciated over 10 years. As a result, the Company changed the depreciation life of the Texas jurisdictional portion of its decommissioning of Palo Verde from 10 years to 27.25 years, the remaining

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

service life of Palo Verde based on the license expiration date of Unit 3. The remaining portion of the plant investment related to the decommissioning of Palo Verde continues to be depreciated over 10 years. For all other utility plant, Texas and New Mexico depreciation lives are the same. Amortization of intangible plant (software) is provided on a straight-line basis over the estimated useful life of the asset (ranging from 3 to 10 years).

The Company charges the cost of repairs and minor replacements to the appropriate operating expense accounts and capitalizes the cost of renewals and betterments. Gains or losses resulting from retirements or other dispositions of operating property in the normal course of business are credited or charged to the accumulated provision for depreciation.

The Company recorded a liability for its interest in Palo Verde equal to the present value of the Company’s portion of total estimated decommissioning costs using a cost inflation rate of 3% and a discount rate of 6%. Accretion of the decommissioning liability is charged to other interest charges in the statements of operations. Changes in the decommissioning liability arising from changes in the timing or amount of estimated total decommissioning costs are capitalized to utility plant.

The cost of nuclear fuel is amortized to fuel expense on a units–of–production basis. A provision for spent fuel disposal costs is charged to expense based on requirements of the Department of Energy (the “DOE”) for disposal cost of approximately one–tenth of one cent on each kWh generated. The Company is also expensing its share of costs, as incurred, associated with on-site spent fuel storage at Palo Verde. See Note C.

Impairment of Long-Lived Assets. The Company evaluates impairment of its long-lived assets and certain intangible assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset.

Capitalized Interest . The Company capitalizes interest cost to construction work in progress and nuclear fuel in process in accordance with SFAS No. 34, “Capitalization of Interest Cost.”

Cash and Cash Equivalents . All temporary cash investments with an original maturity of three months or less are considered cash equivalents.

Investments . The Company’s marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair market value and consist primarily of equity securities and municipal, federal and corporate bonds in trust funds established for decommissioning of its interest in Palo Verde. Such marketable securities are classified as “available–for–sale” securities and, as such, unrealized gains and losses are included in accumulated other comprehensive income as a separate component of common stock equity. However, if declines in fair value of marketable securities below original cost basis are determined to be other than temporary, then the declines are reported as losses in the consolidated statement of operations and a new cost basis is established for the affected securities at fair value.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories . Inventories, primarily parts, materials, supplies and fuel oil are stated at average cost not to exceed recoverable cost.

Electric Utility Operating Revenues Net of Energy Expenses . The Company accrues revenues for services rendered, including unbilled electric service revenues. Energy expenses are stated at actual cost incurred. The Company’s Texas and New Mexico (as of June 2001) retail customers are presently being billed under a fixed fuel factor approved by the state commissions. The Company’s recovery of energy expenses in these jurisdictions is subject to periodic reconciliations of actual energy expenses incurred to actual fuel revenues collected. Rate tariffs currently applicable to certain FERC jurisdictional customers contain energy cost adjustment provisions designed to recover the Company’s actual energy expenses. The difference between energy expenses incurred and fuel revenues charged to the Company’s Texas, New Mexico and applicable FERC jurisdictional customers, as determined under Texas and New Mexico Commission rules and FERC rate tariffs, is reflected as net over/undercollection of fuel revenues in the balance sheets.

Allowance for Doubtful Accounts. Additions, deductions and balances for allowance for doubtful accounts for 2001, 2000 and 1999 are as follows (in thousands):

	2001		2000		1999
Balance at beginning of year	$	3,325	$	2,461	$	1,770
Additions:
Charged to costs and expense		3,962		2,871		2,431
Charged to other accounts(1)		689		541		715
Deductions(2)		4,451		2,548		2,455

Balance at end of year	$	3,525	$	3,325	$	2,461

(1)

Recovery of amounts previously written off.

(2)

Uncollectible receivables written off.

Income Taxes . The Company accounts for federal and state income taxes under the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the estimated future tax consequences of “temporary differences” by applying enacted statutory tax rates for each taxable jurisdiction applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets to the extent it is more likely than not that such deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.

Earnings per Share . Basic earnings per common share is computed by dividing net income, after deducting the preferred stock dividend requirements, by the weighted average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income, after deducting the preferred stock dividend requirements, by the weighted average number of common shares and dilutive potential common shares outstanding.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Benefit Plans . See Note J for accounting policies regarding the Company’s retirement plans and postretirement benefits.

Stock Options and Restricted Stock. The Company has a long-term incentive plan which reserves shares of common stock for issuance to officers, key employees and non-employee directors through the award or grant of stock options and restricted stock. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Accordingly, compensation expense is recognized for the intrinsic value, if any, of option grants at measurement date ratably over the vesting period of the options. Compensation expense for the restricted stock awards is recognized for the fair value as measured by the quoted market price of the shares at the award date ratably over the restriction period. Unearned compensation related to restricted stock awards is shown as a reduction of common stock equity.

Reclassification. Certain amounts in the financial statements for 2000 and 1999 have been reclassified to conform with the 2001 presentation.

Supplemental Statements of Cash Flows Disclosures (in thousands)

	Years Ended December 31,
	2001		2000		1999
Cash paid for:
Interest on long-term debt and financing obligations	$	61,067	$	64,141	$	72,600
Income taxes		3,550		1,200		1,882
Other interest		23		237		702
Non-cash investing and financing activities:
Grants of restricted shares of common stock		2,597		1,761		1,716
Remeasurements of options		430		–		–
Acquisition of treasury stock for options exercised		–		500		–
Issuance of preferred stock for pay-in-kind dividends		–		–		3,867
Change in estimate of decommissioning liability capitalized to electric plant in service		1,795		–		–

B. Regulation

General

In 1999, both Texas and New Mexico enacted electric utility industry restructuring laws requiring competition in certain functions of the industry and ultimately in the Company’s service area.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Competition in New Mexico was scheduled to begin on January 1, 2002 under the New Mexico Restructuring Law. On March 8, 2001, however, the New Mexico Restructuring Law was amended to delay the start of competition for five years until January 1, 2007. Under the Texas Restructuring Law, the Company’s Texas service area is exempt from competition until the expiration of the Freeze Period in August 2005.

Texas Regulatory Matters

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

activities after expiration of the Freeze Period in August 2005. Accordingly, in either 2004 or 2005, the Company will seek New Mexico Commission approval to separate the Company’s generation activities from its transmission and distribution activities to allow the Company to comply with the Texas Restructuring Law requirements.

The Company anticipates terminating its interim fuel surcharge earlier than expected and anticipates filing a petition with the Texas Commission in April 2002 to end that surcharge of

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

underrecovered fuel costs. The interim fuel surcharge, as well as the Company’s other energy expenses through year–end 2001, will be subject to final review by the Texas Commission in the Company’s next fuel reconciliation proceeding, which is expected to be filed in June 2002. The Texas Commission staff, local regulatory authorities such as the City of El Paso, and customers are entitled to intervene in a fuel reconciliation proceeding and to challenge the prudence of fuel and purchased power expenses.

New Mexico Regulatory Matters

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and distribution activities in either 2004 or 2005 to allow the Company to restructure at the earliest time allowable.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Federal Regulatory Matters

Department of Energy. The DOE regulates the Company’s exports of power to Comision Federal de Electricidad de Mexico (“CFE”) in Mexico pursuant to a license granted by the DOE and a presidential permit. The DOE has determined that all such exports over international transmission lines shall be made in accordance with Order No. 888, which established the FERC rules for open access. The DOE is authorized to assess operators of nuclear generating facilities a share of the costs of decommissioning the DOE’s uranium enrichment facilities and for the ultimate costs of disposal of spent nuclear fuel. See Note C for discussion of spent fuel storage and disposal costs.

Nuclear Regulatory Commission. The Nuclear Regulatory Commission (“NRC”) has jurisdiction over the Company’s licenses for Palo Verde and regulates the operation of nuclear generating stations to protect the health and safety of the public from radiation hazards. The NRC also has the authority to conduct environmental reviews pursuant to the National Environmental Policy Act.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales for Resale

During 2001, the Company provided Imperial Irrigation District (“IID”) with 100 MW of firm capacity and associated energy and 50 MW of system contingent capacity and associated energy pursuant to a 17–year agreement which expires on April 30, 2002. The Company also provided Texas–New Mexico Power (“TNP”) in 2001 with up to 25 MW of firm capacity and associated energy pursuant to an agreement that expires on December 31, 2002. The contract allows TNP to specify a maximum annual amount up to 75 MW with one year’s notice. The Company received notice from TNP in December 2000 that TNP was electing to take 75 MW in 2002. The Company also sold 40 MW of firm capacity and associated energy to CFE during May 2001 and 100 MW during June through September 2001.

C. Palo Verde and Other Jointly-Owned Utility Plant

The Company owns a 15.8% interest in each of the three nuclear generating units and Common Facilities at Palo Verde. The Palo Verde Participants include the Company, five other utilities and Arizona Public Service Company (“APS”), which serves as operating agent for Palo Verde. The operation of Palo Verde and the relationship among the Palo Verde Participants is governed by the Arizona Nuclear Power Project Participation Agreement (the “ANPP Participation Agreement”).

Other jointly-owned utility plant includes a 7% interest in Units 4 and 5 at Four Corners Generating Station (“Four Corners”) and certain other transmission facilities. A summary of the Company’s investment in jointly-owned utility plant, excluding fuel, at December 31, 2001 and 2000 is as follows (in thousands):

	December 31, 2001						December 31, 2000
	Palo Verde Station			Other			Palo Verde Station			Other
Electric plant in service	$	606,743		$	183,942		$	599,798		$	182,982
Accumulated depreciation		(120,454	)		(84,631	)		(102,862	)		(70,097	)
Construction work in progress		29,152			1,826			19,405			1,681

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company’s funding requirements are determined periodically based upon engineering cost estimates performed by outside engineers retained by APS.

Historically, regulated utilities such as the Company have been permitted to collect in rates the costs of nuclear decommissioning. Under deregulation legislation in both Texas and New Mexico, the Company expects to continue to be able to collect from customers the costs of decommissioning. The collection mechanism in both states will be a “non-bypassable wires charge” through which all customers, even those who choose to purchase energy from a supplier other than the Company, will pay a fee to the Company’s electric distribution subsidiary. The amount of this fee will be approved by the Texas and New Mexico Commissions and will cover decommissioning, among other things. In the Company’s case, the fee will begin to be collected in Texas following the end of the Freeze Period in August 2005 and in New Mexico in 2007, which is the current date for the beginning of retail deregulation. While the Company is entitled to collect decommissioning costs in full under Texas law, there is some uncertainty in New Mexico as to the ability to collect 100% of such costs. See Note B.

The Company has established external trusts with independent trustees, which enable the Company to record a current deduction for federal income tax purposes of a portion of amounts funded. As of December 31, 2001 and 2000, the fair market value of the trust funds was approximately $60.9 million and $60.2 million, respectively, which is reflected in the Company’s balance sheets in deferred charges and other assets.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are expected to be available for use by the end of 2002. APS believes that spent fuel storage or disposal methods will be available for use by Palo Verde to allow its continued operation through the term of the operating license for each Palo Verde unit.

Steam Generators. Palo Verde has experienced some degradation in the steam generator tubes of each unit. APS has undertaken an ongoing investigation and analysis and has performed corrective

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

actions designed to mitigate further degradation. Corrective actions have included changes in operational procedures designed to lower the operating temperatures of the units, chemical cleaning and the implementation of other technical improvements.

The Texas Rate Stipulation precludes the Company from seeking a rate increase to recover additional capital costs incurred at Palo Verde during the Freeze Period. The Company may request recovery of a portion of these costs through regulated rates in New Mexico. See Note B. Finally, the Company cannot assure that it will be able to recover these capital costs through its wholesale power rates or its competitive retail rates that become applicable after the start of competition.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

an annual limit of $10 million per incident. Based upon the Company’s 15.8% interest in Palo Verde, the Company’s maximum potential retrospective assessment per incident is approximately $41.8 million for all three units with an annual payment limitation of approximately $4.7 million.

D. Common Stock

Overview

The Company’s common stock has a stated value of $1 per share, with no cumulative voting rights or preemptive rights. Holders of the common stock have the right to elect the Company’s directors and to vote on other matters.

Long-Term Incentive Plans

The Company shareholders have approved the adoption of two stock-based long-term incentive plans. The first plan was approved in 1996 (the “1996 Plan”) and authorized the issuance of up to 3.5 million shares of common stock for the benefit of officers, key employees and directors. The second plan was approved in 1999 (the “1999 Plan”) and authorized the issuance of up to two million shares of common stock for the benefits of directors, officers, managers, other employees and consultants. The common stock will be issued through the award or grant of non-statutory stock options, incentive stock options, stock appreciation rights, restricted stock, bonus stock and performance stock.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options. Stock options have been granted at exercise prices equal to or greater than the market value of the underlying shares at the date of grant. The options expire ten years from the date of grant unless terminated earlier by the Board of Directors. The following table summarizes the transactions of the Company’s stock options for 2001, 2000 and 1999:

	Number of		Weighted Average Exercise
	Shares		Price
Unexercised options outstanding at December 31, 1998	2,535,000		$	6.17
Options granted	255,644			8.24
Options exercised	–			–
Options forfeited	–			–

Unexercised options outstanding at December 31, 1999	2,790,644			6.36
Options granted	248,159			11.48
Options exercised	(93,955	)		5.32
Options forfeited	–			–

Unexercised options outstanding at December 31, 2000	2,944,848			6.86
Options granted	706,677			14.04
Options exercised	(1,396,045	)		5.93
Options forfeited	–			–

Unexercised options outstanding at December 31, 2001	2,255,480			9.64

Stock option awards provide for vesting periods of up to six years. Stock options outstanding and exercisable at December 31, 2001 are as follows:

	Options Outstanding				Options Exercisable
Exercise Price Range	Number Outstanding	Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$ 5.56 — $ 9.8125	1,393,076	5.4	$	7.08	1,071,076	$	6.78
10.375 — 15.99	862,404	9.6		13.77	162,404		12.63

	2,255,480				1,233,480

The number of stock options exercisable and the weighted average exercise price of these stock options at December 31, 2001, 2000 and 1999 are as follows:

	December 31,
	2001		2000		1999
Number of stock options exercisable		1,233,480		2,159,848		1,770,644
Weighted average exercise price	$	7.55	$	6.22	$	6.06

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, compensation expense is only recognized for any intrinsic value of stock option grants at the measurement date. Had compensation expense for the plan been determined based on the fair value at the grant date, consistent with the provisions of SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts presented below:

	Years Ended December 31,
	2001		2000		1999
Net income applicable to common stock (in thousands):
As reported	$	63,659	$	58,392	$	28,276
Pro forma		62,275		57,403		27,380
Basic earnings per share:
As reported		1.25		1.08		0.48
Pro forma		1.23		1.06		0.46
Diluted earnings per share:
As reported		1.23		1.06		0.47
Pro forma		1.20		1.04		0.46

The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model. Weighted average assumptions and grant-date fair value for 2001, 2000 and 1999 are presented below:

	2001			2000			1999
Risk-free interest rate		5.06	%		6.23	%		5.01	%
Expected life, in years		10			10			10
Expected volatility		27.92	%		33.85	%		33.98	%
Expected dividend yield		–			–			–
Fair value per option	$	7.18		$	6.78		$	4.58

Restricted Stock . The Company has awarded vested and unvested restricted stock awards under the 1996 and 1999 Plans. Restrictions from resale generally lapse, and unvested awards vest, over periods of four to five years. The market value of vested restricted stock awards is expensed at the time of grant. The market value of the unvested restricted stock at the time of grant is recorded as unearned compensation as a separate component of common stock equity and is amortized to expense over the

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

restriction period. During 2001, 2000 and 1999, approximately $1.8 million, $1.6 million and $1.2 million, respectively, related to restricted stock awards was charged to expense. The following table summarizes the vested and unvested restricted stock awards for 2001, 2000 and 1999:

	Vested		Unvested		Total
Restricted shares outstanding at December 31, 1998	46,464		101,521		147,985
Restricted stock awards	94,619		116,125		210,744
Lapsed restrictions and vesting	(40,488	)	(58,021	)	(98,509	)
Forfeitures	–		(1,432	)	(1,432	)

Restricted shares outstanding at December 31, 1999	100,595		158,193		258,788
Restricted stock awards	74,539		102,730		177,269
Lapsed restrictions and vesting	(85,107	)	(74,884	)	(159,991	)
Forfeitures	–		–		–

Restricted shares outstanding at December 31, 2000	90,027		186,039		276,066
Restricted stock awards	15,929		171,341		187,270
Lapsed restrictions and vesting	(105,956	)	(86,850	)	(192,806	)
Forfeitures	–		(3,196	)	(3,196	)

Restricted shares outstanding at December 31, 2001	–		267,334		267,334

The weighted average market values at grant date for restricted stock awarded during 2001, 2000 and 1999 are $13.87, $9.93 and $8.14, respectively.

The holder of a restricted stock award has rights as a shareholder of the Company, including the right to vote and, if applicable, receive cash dividends on restricted stock, except that certain restricted stock awards require any cash dividend on restricted stock to be delivered to the Company in exchange for additional shares of restricted stock of equivalent market value.

Common Stock Repurchase Program

The Company’s Board of Directors previously approved two stock repurchase programs allowing the Company to purchase up to twelve million of its outstanding shares of common stock. On February 7, 2002, the Company’s Board of Directors approved a third stock repurchase program allowing the Company to purchase up to three million shares of common stock. As of December 31, 2001, the Company had repurchased 11,921,329 shares of common stock under these programs for approximately $133.9 million, including commissions. The Company expects to continue to make purchases primarily in the open market at prevailing prices and will also engage in private transactions, if appropriate. Any repurchased shares will be available for issuance under employee benefit and stock option plans, or may be retired.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation of Basic and Diluted Earnings Per Common Share

The reconciliation of basic and diluted earnings per common share before extraordinary item is presented below:

	Year Ended December 31, 2001
	Income		Shares	Per Common Share
	(In thousands)
Basic earnings per common share:
Income before extraordinary item	$	65,878	50,821,140	$	1.30

Effect of dilutive securities:
Unvested restricted stock		–	66,426
Stock options		–	834,785

Diluted earnings per common share:
Income before extraordinary item	$	65,878	51,722,351	$	1.27


	Year Ended December 31, 2000
	Income		Shares	Per Common Share
	(In thousands)
Basic earnings per common share:
Income before extraordinary item	$	60,164	54,183,915	$	1.11

Effect of dilutive securities:
Unvested restricted stock		–	56,490
Stock options		–	761,220

Diluted earnings per common share:
Income before extraordinary item	$	60,164	55,001,625	$	1.09

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Year Ended December 31, 1999
	Income		Shares	Per Common Share
	(In thousands)
Income before extraordinary item	$	43,809
Less:
Preferred stock:
Dividend requirements		2,616
Redemption costs		9,581

Basic earnings per common share:
Income before extraordinary item applicable to common stock		31,612	59,349,468	$	0.53

Effect of dilutive securities:
Unvested restricted stock		–	32,729
Stock options		–	349,452

Diluted earnings per common share:
Income before extraordinary item applicable
to common stock	$	31,612	59,731,649	$	0.53

Options that were excluded from the computation of diluted earnings per common share because the exercise price was greater than the average market price of the common shares for the period are listed below:

60,000 options granted May 29, 1998 at an exercise price of $9.50 were excluded for all of 1999 and the first quarter of 2000.

100,000 options granted January 11, 1999 at an exercise price of $8.75 were excluded for the first and second quarters of 1999.

42,432 options granted January 1, 2000 at an exercise price of $9.81 were excluded for the first quarter of 2000.

50,000 options granted March 15, 2000 at an exercise price of $9.50 were excluded for the first quarter of 2000.

2,107 options granted October 1, 2000 at an exercise price of $13.77 were excluded for the fourth quarter of 2000 and the first quarter of 2001.

150,000 options granted December 15, 2000 at an exercise price of $12.60 were excluded for the first quarter of 2001.

2,941 options granted January 1, 2001 at an exercise price of $13.20 were excluded for the first quarter of 2001.

150,000 options granted May 10, 2001 at an exercise price of $14.95 were excluded for the second, third and fourth quarters of 2001.

795 options granted April 1, 2001 at an exercise price of $14.60 were excluded for the third and fourth quarters of 2001.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10)

1,424 options granted July 1, 2001 at an exercise price of $15.99 were excluded for the third and fourth quarters of 2001.

11)

100,000 options granted April 23, 2001 at an exercise price of $14.00 were excluded for the fourth quarter of 2001.

E. Preferred Stock and Accumulated Other Comprehensive Income (Loss)

In March 1999, after obtaining required consents of holders of certain of the Company’s outstanding debt securities, the Company redeemed its Series A Preferred Stock. The Company paid the redemption price of approximately $139.6 million, accrued cash dividends of $1.3 million, and premium, fees and costs of securing the consents aggregating $9.6 million. The preferred stock had an annual dividend rate of 11.40%.

Following is a summary of the changes in the preferred stock for 1999:

	Shares		Amount
	(In thousands)

Balance at December 31, 1998	1,357,444		$	135,744
Issuance of pay-in-kind dividends	38,670			3,867
Redemption of preferred stock	(1,396,114	)		(139,611	)

Balance at December 31, 1999	–		$	–

Accumulated other comprehensive income (loss) consists of the following components (in thousands):

	Net Unrealized Gains (Losses) on Marketable Securities			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 1998	$	1,101		$	–		$	1,101
Other comprehensive income		3,078			–			3,078

Balance at December 31, 1999		4,179			–			4,179
Other comprehensive loss		(1,277	)		–			(1,277	)

Balance at December 31, 2000		2,902			–			2,902
Other comprehensive loss		(1,639	)		(511	)		(2,150	)

Balance at December 31, 2001	$	1,263		$	(511	)	$	752

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F. Long-Term Debt and Financing Obligations

Outstanding long-term debt and financing obligations are as follows:

	December 31,
	2001			2000
	(In thousands)
Long-Term Debt:
First Mortgage Bonds (1):
7.75% Series B, issued 1996, due 2001	$	–		$	34,571
8.25% Series C, issued 1996, due 2003		42,913			84,505
8.90% Series D, issued 1996, due 2006		206,682			207,052
9.40% Series E, issued 1996, due 2011		218,334			230,000

Pollution Control Bonds (2):
6.375% 1994 Series A bonds, due 2014		63,500			63,500
6.375% 1985 Series A refunding bonds, due 2015		59,235			59,235
6.150% 1984 Series E refunding bonds, due 2014		37,100			37,100
6.150% 1994 Series A refunding bonds, due 2013		33,300			33,300

Promissory note, due 2007 ($104,000 due in 2002) (3)		365			465

Total long-term debt		661,429			749,728

Financing Obligations:
Nuclear fuel ($19,851,000 due in 2002) (4)		48,291			48,158

Total long-term debt and financing obligations		709,720			797,886

Current maturities (amount due within one year)		(90,355	)		(57,663	)

	$	619,365		$	740,223

(1)

First Mortgage Bonds

Substantially all of the Company’s utility plant is subject to liens under the First Mortgage Indenture. The First Mortgage Indenture imposes certain limitations on the ability of the Company to (i) declare or pay dividends on common stock; (ii) incur additional indebtedness or liens on mortgaged property; and (iii) enter into a consolidation, merger or sale of assets.

The Series C and D bonds may not be redeemed by the Company prior to maturity. The Series E bonds may be redeemed at the option of the Company, in whole or in part, on or after February 1, 2006. The Company is not required to make mandatory redemption or sinking fund payments with respect to the bonds prior to maturity.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Repurchases, excluding redemption upon maturity, of First Mortgage Bonds made during 2001, 2000 and 1999 are as follows (in thousands):

	Years Ended December 31,
	2001		2000		1999
7.75% Series B	$	–	$	4,000	$	24,127
8.25% Series C		41,592		10,000		24,787
8.90% Series D		370		4,350		11,730
9.40% Series E		11,666		20,498		22,900

Total	$	53,628	$	38,848	$	83,544

Internally generated funds were used for the above repurchases. Extraordinary losses of $2.2 million, $1.3 million, and $3.3 million, net of tax, were recorded in 2001, 2000 and 1999, respectively, which relate to these repurchases and include the premiums paid and the unamortized issuance costs for these repurchased First Mortgage Bonds. See Note G.

(2)

Pollution Control Bonds

The Company has four series of tax exempt Pollution Control Bonds in an aggregate principal amount of approximately $193.1 million. Upon the occurrence of certain events, the bonds may be required to be repurchased at the holder’s option or are subject to mandatory redemption. The bonds are redeemable at the option of the Company under certain circumstances. In August 2000, the Company remarketed all four series of the bonds and recorded an extraordinary loss of $0.5 million, net of tax, for the related unamortized issuance costs. The interest rates were fixed for five years for the 6.375% bonds and two years for the 6.15% bonds. This remarketing allowed the Company to discontinue the letters of credit and related First Mortgage Collateral Series Bonds (“Collateral Series Bonds”) that previously enhanced the bond issues. The Company anticipates remarketing the bonds at the end of the two and five year periods, as applicable. The 6.15% bonds are classified as current maturities at December 31, 2001 since they are within one year of being remarketed. The 6.375% bonds are due to be remarketed in 2005.

(3)

Promissory Note

The note has an annual interest rate of 5.5% and is secured by certain furniture and fixtures.

(4)

Nuclear Fuel Financing

The Company has available a $100 million credit facility that was renewed for a three-year term in January 2002. The credit facility provides for up to $70 million for the financing of nuclear fuel, which is accomplished through a trust that borrows under the facility to acquire and process the nuclear fuel. The Company is obligated to repay the trust’s borrowings with interest and has secured this obligation with Collateral Series Bonds. In the Company’s financial statements, the assets and liabilities of the trust are reported as assets and liabilities of the Company. Any amounts not borrowed by the trust may be borrowed by the Company for working capital needs.

The $100 million credit facility requires compliance with certain total debt and interest coverage ratios. The Company was in compliance with these requirements throughout 2001.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2001, the scheduled maturities for the next five years of long-term debt and financing obligations are as follows (in thousands):

2002		$ 90,355
2003		71,463
2004		116
2005		122,770
2006		206,682

The table above does not reflect future obligations and maturities related to nuclear fuel purchase commitments.

G. Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2001 and 2000 are presented below (in thousands):

	December 31,
	2001			2000
Deferred tax assets:
Benefits of federal tax loss carryforwards	$	60,205		$	105,009
Pensions and benefits		44,900			44,642
Decommissioning		33,665			31,307
Investment tax credit carryforward		16,138			20,410
Alternative minimum tax credit carryforward		21,944			18,862
Reorganization expenses financed with bonds		2,841			8,275
Other (including benefits of state tax loss carryforwards)		10,337			26,632

Total gross deferred tax assets		190,030			255,137

Less valuation allowance:
Federal		9,864			12,661
State		–			14,911

Total valuation allowance		9,864			27,572

Net deferred tax assets		180,166			227,565


Deferred tax liabilities:
Plant, principally due to depreciation and basis differences		(236,368	)		(245,412	)
Other		(21,349	)		(29,432	)

Total gross deferred tax liabilities		(257,717	)		(274,844	)

Net accumulated deferred income taxes	$	(77,551	)	$	(47,279	)

The deferred tax asset valuation allowance decreased by approximately $17.7 million, $0.7 million, and $0.7 million in 2001, 2000 and 1999, respectively. The 2001 valuation allowance decrease of $17.7 million consists of (i) a $2.8 million writedown related to expired investment tax credits of $4.3 million less deferred tax benefits of $1.5 million; (ii) a $8.7 million writedown related to the expiration of state net operating loss (“NOL”) carryforwards at the end of 2001 and (iii) a $6.2 million

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

writedown of state valuation allowance, which netted with associated federal tax benefits of $2.2 million resulted in a credit to capital in excess of stated value of $4.0 million in accordance with Statement of Position 90–7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90–7”), to recognize a tax benefit for valuation allowance that was not used. The decreases of $0.7 million for both 2000 and 1999 were due to a reduction of unused state NOL carryforward benefits, which had valuation allowances recorded against them.

Based on the average annual book income before taxes for the prior three years, excluding the effects of extraordinary and unusual or infrequent items, the Company believes that the net deferred tax assets will be fully realized at current levels of book and taxable income. The Company’s valuation allowance of $9.9 million at December 31, 2001, if subsequently recognized as a tax benefit, would be credited directly to capital in excess of stated value in accordance with SOP 90-7.

The Company recognized income taxes as follows (in thousands):

	Years Ended December 31,
	2001			2000			1999
Income tax expense:
Federal:
Current	$	3,354		$	2,306		$	2,142
Deferred		28,097			30,881			20,415

Total federal income tax expense from operations		31,451			33,187			22,557
Deferred included in extraordinary item		(1,195	)		(954	)		(1,796	)

Total federal income tax expense	$	30,256		$	32,233		$	20,761

State:
Deferred	$	4,973		$	5,709		$	3,075
Deferred included in extraordinary item		(220	)		(172	)		(331	)

Total state income tax expense	$	4,753		$	5,537		$	2,744

The current federal income tax expense for 2001, 2000 and 1999 results primarily from the accrual of alternative minimum tax (“AMT”). Deferred federal income tax includes an offsetting AMT benefit of $3.1 million, $2.1 million and $2.1 million for 2001, 2000 and 1999, respectively.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Federal income tax provisions differ from amounts computed by applying the statutory rate of 35% to book income before federal income tax as follows (in thousands):

	Years Ended December 31,
	2001			2000			1999
Federal income tax expense computed on income at statutory rate	$	32,870		$	31,719		$	21,432
Difference due to:
Adjustment to cash value of Company-owned life insurance policies		(60	)		(103	)		(608	)
Transition costs		(362	)		442			123
Reduction in estimated contingent tax liability		(2,596	)		–			–
Other		404			175			(186	)

Total federal income tax expense	$	30,256		$	32,233		$	20,761

Effective federal income tax rate		32.2	%		35.6	%		33.9	%

As of December 31, 2001, the Company had $172 million of federal tax NOL carryforwards, $16.1 million of investment tax credit (“ITC”) carryforwards, and $21.9 million of AMT credit carryforwards. If unused, the NOL carryforwards would expire at the end of 2011, the ITC carryforwards would expire in 2002 through 2005, and the AMT credit carryforwards have an unlimited life. The Company recorded a writedown of its expired state NOL carryforwards at the end of 2001. These tax attributes are subject to change by the Internal Revenue Service (the “IRS”) which recently concluded the field work on its examination of the Company’s 1996 through 1998 federal income tax returns. The Company recorded a $2.6 million adjustment to reduce its estimated contingent tax liabilities based upon discussions and agreed issues with taxing authorities. This $2.6 million adjustment was included as a component of deferred income tax expense. See Note H for further discussion of the IRS examination.

H. Commitments and Contingencies

Power Contracts

As of December 31, 2001, the Company had entered into the following agreements with various counterparties for forward firm purchases and sales of electricity:

Type of Contract	Quantity	Term
Purchase on-peak	128 MW	2002
Sale off-peak	25 MW	2002
Purchase on-peak	25 MW	April through October 2002
Purchase on-peak	60 MW	June through September 2002
Sale on-peak	60 MW	June through September 2002
Purchase on-peak	103 MW	2003 through 2005

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Environmental Matters

The following are expenditures incurred by the Company in 2001, 2000 and 1999 for complying with federal environmental statutes (in thousands):

	2001		2000		1999
Clean Air Act	$	718	$	800	$	538
Federal Clean Water Act		281		770		2,251

The Company is not under any environmental investigation by the Environmental Protection Agency, the Texas Natural Resources Conservation Commission or the New Mexico Environment Department. In addition, the Company has not been named as a Potentially Responsible Party pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980.

Tax Matters

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

payments made on emergence from Chapter 11 bankruptcy proceedings related to Palo Verde and (ii) the settlement of litigation in 1997 concerning a terminated merger during the Company’s bankruptcy. The Company has protested the audit adjustments through administrative appeals and believes that its treatment of the payments is supported by substantial legal authority. In the event that the IRS prevails, the resulting income tax and interest payments could be material to the Company’s financial position, results of operations and cash flows. The Company believes that the audit adjustments can be resolved through administrative appeals and that adequate provision has been made through December 31, 2001 for any additional tax that may be due.

Lease Agreements

The Company has an operating lease for a turbine and certain other related equipment through July 2005, with an extension option for two additional years. The lease requires semiannual lease payments of approximately $0.4 million.

The Company has one other significant operating lease for administrative offices. The lease has a 10-year term and an option to renew for an additional 10 years. The minimum lease payments are $1.0 million annually and are adjusted each year by 50% of the percentage change of the Consumer Price Index.

Neither lease agreement imposes any restrictions relating to issuance of additional debt, payment of dividends or entering into other lease arrangements. The Company has no significant capital lease agreements.

As of December 31, 2001, the Company’s minimum future rental payments for the next five years are as follows (in thousands):

2002		$1,800
2003		1,800
2004		1,800
2005		1,400
2006		1,000

I. Litigation

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

J. Employee Benefits

Retirement Plans

The Company’s Retirement Income Plan (the “Retirement Plan”) covers employees who have completed one year of service with the Company, are 21 years of age and work at least a minimum number of hours each year. The Retirement Plan is a qualified noncontributory defined benefit plan. Upon retirement or death of a vested plan participant, assets of the Retirement Plan are used to pay benefit obligations under the Retirement Plan. Contributions from the Company are based on the minimum funding amounts required by the Department of Labor and IRS under provisions of the Retirement Plan, as actuarially calculated. The assets of the Retirement Plan are invested in equity securities, fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company.

The Company’s Non-Qualified Retirement Income Plan is a non–funded defined benefit plan which covers certain former employees of the Company. During 1996, as part of the Company’s reorganization, the Company terminated the Non-Qualified Retirement Income Plan with respect to all active employees. The benefit cost for the Non-Qualified Retirement Income Plan is based on substantially the same actuarial methods and economic assumptions as those used for the Retirement Plan.

The Company accounts for the Retirement Plan and the Non-Qualified Retirement Income Plan under SFAS No. 87, “Employers’ Accounting for Pensions,” (“SFAS No. 87”). In accordance with SFAS No. 87, the net periodic benefit cost includes amortization of unrecognized net gains or losses, which exceeded 10% of the benefit obligation at the beginning of the year. Unrecognized gains or losses on investment assets of the plans are not amortized. The amortization reflects the excess divided by the average remaining service period of active employees expected to receive benefits.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amounts recognized in the Company’s balance sheets and the funded status of the plans at December 31, 2001 and 2000 are presented below (in thousands):

	Years Ended December 31,
	2001						2000
	Retirement Income Plan			Non-Qualified Retirement Income Plan			Retirement Income Plan			Non-Qualified Retirement Income Plan
Change in benefit obligation:
Benefit obligation at beginning of year	$	(103,313	)	$	(18,256	)	$	(87,727	)	$	(17,713	)
Service cost		(3,085	)		–			(2,670	)		–
Interest cost		(7,363	)		(1,278	)		(6,839	)		(1,323	)
Actuarial loss		(4,392	)(1)		(568	)		(9,624	)(1)		(901	)
Benefits paid		3,987			1,668			3,547			1,681

Benefit obligation at end of year		(114,166	)		(18,434	)		(103,313	)		(18,256	)


Change in fair value of plan assets:
Fair value of plan assets at beginning of year		89,451			–			86,453			–
Actual return (loss) on plan assets		(7,265	)		–			3,218			–
Employer contribution		3,360			1,668			3,327			1,681
Benefits paid		(3,987	)		(1,668	)		(3,547	)		(1,681	)

Fair value of plan assets at end of year		81,559			–			89,451			–

Funded status		(32,607	)		(18,434	)		(13,862	)		(18,256	)
Unrecognized net loss		20,347			824			984			–
Balance of additional liability		–			(824	)		–			–

Accrued benefit liability	$	(12,260	)	$	(18,434	)	$	(12,878	)	$	(18,256	)

(1)

Represents a decrease in the discount rate.

Weighted average actuarial assumptions used in determining the actuarial present value of the benefit obligations are as follows:

	2001				2000
	Retirement Income Plan		Non-Qualified Retirement Income Plan		Retirement Income Plan		Non-Qualified Retirement Income Plan
Discount rate	7.00	%	7.00	%	7.25	%	7.25	%
Expected return on plan assets	8.50	%	N/A		8.50	%	N/A
Rate of compensation increase	5.00	%	N/A		5.00	%	N/A

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net periodic benefit cost is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):

	Years Ended December 31,
	2001			2000			1999
Components of net periodic benefit cost:
Service cost	$	3,085		$	2,670		$	3,155
Interest cost		8,641			8,162			7,566
Expected return on plan assets		(7,673	)		(7,307	)		(6,597	)
Amortization of unrecognized gain		–			(115	)		–

Net periodic benefit cost	$	4,053		$	3,410		$	4,124

Weighted average actuarial assumptions used in determining the net periodic benefit costs are as follows:

	2001		2000		1999
Discount rate	7.25	%	7.75	%	6.75	%
Expected return on plan assets	8.50	%	8.50	%	8.50	%
Rate of compensation increase	5.00	%	5.00	%	5.00	%

Other Postretirement Benefits

The Company provides certain health care benefits for retired employees and their eligible dependents and life insurance benefits for retired employees only. Substantially all of the Company’s employees may become eligible for those benefits if they reach retirement age while working for the Company. Those benefits are accounted for under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” (“SFAS No. 106”). In accordance with SFAS No. 106, the 2001, 2000 and 1999 net periodic benefit cost includes amortization of unrecognized net gains or losses which exceeded 10% of the benefit obligation at the beginning of the year in which they occurred. The amortization reflects the excess divided by the average remaining service period of active employees expected to receive benefits. Unrecognized gains or losses on investment assets of the plans are not amortized. Contributions from the Company are based on the funding amounts required by the Texas Commission in the Texas Rate Stipulation. The assets of the plan are invested in fixed income instruments and cash equivalents and are managed by professional investment managers appointed by the Company.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amounts recognized in the Company’s balance sheets and the funded status of the plan at December 31, 2001 and 2000 are presented below (in thousands):

	December 31,
	2001			2000
Change in benefit obligation:
Benefit obligation at beginning of year	$	(67,746	)	$	(53,946	)
Service cost		(3,170	)		(2,289	)
Interest cost		(5,548	)		(4,357	)
Actuarial loss		(14,128	)(1)		(8,727	)(1)
Retirees’ contributions		(313	)		(230	)
Benefits paid		2,399			1,803

Benefit obligation at end of year		(88,506	)		(67,746	)


Change in fair value of plan assets:
Fair value of plan assets at beginning of year		15,299			13,525
Actual loss on plan assets		(402	)		(75	)
Employer contribution		3,422			3,422
Retirees’ contributions		313			230
Benefits paid		(2,399	)		(1,803	)

Fair value of plan assets at end of year		16,233			15,299


Funded status		(72,273	)		(52,447	)
Unrecognized net gain		(12,701	)		(29,337	)

Accrued benefit liability	$	(84,974	)	$	(81,784	)

(1)

Represents a decrease in the discount rate.

Net periodic benefit cost is made up of the components listed below (in thousands):

	Years Ended December 31,
	2001			2000			1999
Components of net periodic benefit cost:
Service cost	$	3,170		$	2,289		$	2,226
Interest cost		5,548			4,357			3,994
Expected return on plan assets		(942	)		(444	)		(381	)
Amortization of unrecognized gain		(1,164	)		(2,171	)		(1,719	)

Net periodic benefit cost	$	6,612		$	4,031		$	4,120

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Weighted average assumptions are as follows:

	2001	2000	1999
Discount rate	7.00%	7.25%	7.75%
Expected return on plan assets	5.90%	4.50%	4.50%
Rate of compensation increase	5.00%	5.00%	5.00%

For measurement purposes, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002; the rate was assumed to decrease gradually to 6% for 2006 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. The effect of a 1% change in these assumed health care cost trend rates would increase or decrease the benefit obligation by $14.0 million or $11.2 million, respectively. In addition, such a 1% change would increase or decrease the aggregate service and interest cost components of net periodic benefit cost by $1.6 million or $1.3 million, respectively.

All Employee Cash Bonus Plan

The All Employee Cash Bonus Plan (the “Bonus Plan”), was established to reward employees for their contribution in helping the Company attain its corporate goals. Eligible employees below manager level would receive a cash bonus if the Company attained established levels of safety, customer satisfaction and financial results during 2001. The financial goal had to be met before any bonus amounts would be paid and the improvement in financial results had to be greater than any bonus amounts paid. The Company was able to attain the required minimum levels of improvements in all the performance measures for 2001. As a result of the Company’s success, the Company expensed in 2001, 2000 and 1999 approximately $3.7 million, $4.3 million and $4.3 million, respectively, in cash bonuses. The Company has renewed the Bonus Plan in 2002 with similar goals.

K. Franchises and Significant Customers

City of El Paso Franchise

The Company’s major franchise is with the City of El Paso, Texas. The franchise agreement includes a 2% annual franchise fee (approximately $7.2 million per year currently) and provides an arrangement for the Company’s utilization of public rights-of-way necessary to serve its retail customers within the City of El Paso. The franchise with the City of El Paso extends through August 1, 2005.

Las Cruces Franchise

The Company and Las Cruces entered into a seven-year franchise agreement with a 2% annual franchise fee (approximately $1.0 million per year currently) for the provision of electric distribution service in February 2000. Las Cruces is prohibited during this seven-year period from taking any action to condemn or otherwise attempt to acquire the Company’s distribution system, or attempt to operate or build its own electric distribution system. Las Cruces will have a 90-day non-assignable option at the end of the Company’s seven-year franchise agreement to purchase the portion of the Company’s

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

distribution system that serves Las Cruces at a purchase price of 130% of the Company’s book value at that time. If Las Cruces exercises this option, it is prohibited from reselling the distribution assets for two years. If Las Cruces fails to exercise this option, the franchise and standstill agreements will be extended for an additional two years.

Military Installations

The Company currently serves Holloman Air Force Base (“Holloman”), White Sands Missile Range (“White Sands”) and the United States Army Air Defense Center at Fort Bliss (“Ft. Bliss”). The Company’s sales to the military bases represent approximately 3% of annual operating revenues. The Company currently has long-term contracts with all three military bases that it serves. The Company signed a contract with Ft. Bliss in December 1998, under which Ft. Bliss will take service from the Company through December 2008. The Company has a contract to provide retail electric service to Holloman for a ten-year term which began in December 1995. In May 1999, the Army and the Company entered into a new ten-year contract to provide retail electric service to White Sands.

L. Financial Instruments

SFAS No. 107, “Disclosure about Fair Value of Financial Instruments,” requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, accounts receivable, decommissioning trust funds, long-term debt and financing obligations, accounts payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Decommissioning trust funds are carried at market value.

The fair values of the Company’s long-term debt and financing obligations, including the current portion thereof, are based on estimated market prices for similar issues at December 31, 2001 and 2000 and are presented below (in thousands):

	2001				2000
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
First Mortgage Bonds	$	467,929	$	513,619	$	556,128	$	600,767
Pollution Control Bonds		193,135		198,791		193,135		194,350
Nuclear Fuel Financing(1)		48,291		48,291		48,158		48,158

Total	$	709,355	$	760,701	$	797,421	$	843,275

(1)

The interest rate on the Company’s financing for nuclear fuel purchases is reset every quarter to reflect current market rates. Consequently, the carrying value approximates fair value.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended, including implementation guidance discussed by the Financial Accounting Standards Board’s (the “FASB”) Derivatives Implementation Group (the “DIG”) and cleared by the FASB as of January 1, 2001. This standard requires the recognition of derivatives as either assets or liabilities in the balance sheet with measurement of those instruments at fair value. Any changes in the fair value of these instruments are recorded in earnings or other comprehensive income.

The Company uses commodity contracts to manage its exposure to price and availability risks for fuel purchases and power sales and purchases and these contracts generally have the characteristics of derivatives. The Company does not trade or use these instruments with the objective of earning financial gains on the commodity price fluctuations. The Company determined, upon implementation of SFAS No. 133, that all such contracts that had the characteristics of derivatives met the “normal purchases and normal sales” exception provided in SFAS No. 133, and, as such, were not required to be accounted for as derivatives pursuant to SFAS No. 133 and other guidance.

At July 1, 2001, the Company implemented DIG Issue C10, “Scope Exceptions: Can Option Contracts and Forward Contracts with Optionality Features Qualify for the Normal Purchases and Normal Sales Exception,” DIG Issue C15, “Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity,” and DIG Issue C16, “Scope Exceptions: Applying the Normal Purchases and Normal Sales Exception to Contracts That Combine a Forward Contract and a Purchased Option Contract.” Based upon this implementation, the Company determined that certain of its natural gas commodity contracts with optionality features are not eligible for the normal purchases exception and, therefore, are required to be accounted for as derivative instruments pursuant to SFAS No. 133. However, as of December 31, 2001, the variable, market-based pricing provisions of existing gas contracts are such that these derivative instruments have no significant fair value. The Company also determined that, as of December 31, 2001, all existing power sales and purchases contracts met the specific criteria listed in DIG Issue C15 and, therefore, continue to qualify for the normal purchases and normal sales exception.

The FASB has continued to issue additional guidance on SFAS No. 133, including providing revised guidance on DIG Issue C15 on December 28, 2001. The ultimate effects of this revised guidance, which will be implemented on April 1, 2002, may impact the Company’s application of SFAS No. 133.

EL PASO ELECTRIC COMPANY AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

M. Selected Quarterly Financial Data (Unaudited)

	2001 Quarters											2000 Quarters
	4th			3rd			2nd			1st		4th		3rd			2nd		1st
							(In thousands except for share data)

Operating revenues	$	162,721		$	210,482		$	203,623		$	192,879	$	180,730	$	211,410		$	171,464	$	138,045
Operating income		25,735			58,096			36,015			47,756		35,652		57,744			43,786		31,792
Income before extraordinary item		9,220			25,794			12,266			18,598		10,998		25,442			15,164		8,560
Extraordinary gain (loss) on extinguishments of debt, net of income tax (expense) benefit		(1,228	)		(830	)		(161	)		–		–		(1,223	)		4		(553	)
Net income applicable to common stock		7,992			24,964			12,105			18,598		10,998		24,219			15,168		8,007
Basic earnings per common share:
Income before extraordinary item		0.18			0.51			0.24			0.36		0.21		0.47			0.28		0.16
Extraordinary loss on extinguishments of debt, net of income tax benefit		(0.02	)		(0.02	)		–			–		–		(0.02	)		–		(0.01	)
Net income		0.16			0.49			0.24			0.36		0.21		0.45			0.28		0.15
Diluted earnings per common share:
Income before extraordinary item		0.18			0.50			0.23			0.36		0.21		0.46			0.28		0.15
Extraordinary loss on extinguishments of debt, net of income tax benefit		(0.02	)		(0.02	)		–			–		–		(0.02	)		–		(0.01	)
Net income		0.16			0.48			0.23			0.36		0.21		0.44			0.28		0.14

Item

9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

Item

10. Directors and Executive Officers of the Registrant

Information regarding directors is incorporated herein by reference from the Company’s definitive proxy statement for the 2002 Annual Meeting of Shareholders (the “2002 Proxy Statement”). Information regarding executive officers of the Company, included herein under the caption “Executive Officers of the Registrant” in Part I, Item 1 above, is incorporated herein by reference.

Item 11. Executive Compensation

Incorporated herein by reference from the 2002 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Incorporated herein by reference from the 2002 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

Incorporated herein by reference from the 2002 Proxy Statement.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8–K

(a) Documents filed as a part of this report:
		Page
1. Financial Statements:

See Index to Financial Statements		35

2. Financial Statement Schedules:

All schedules are omitted as the required information is not applicable or is included in the financial statements or related notes thereto.

3. Exhibits

Certain of the following documents are filed herewith. Certain other of the following exhibits have heretofore been filed with the Securities and Exchange Commission, and, pursuant to Rule 12b–32 and Regulation 201.24, are incorporated herein by reference.

INDEX TO EXHIBITS

Exhibit Number		Title

Exhibit 3 – Articles of Incorporation and Bylaws:

3.01	–	Restated Articles of Incorporation of the Company, dated February 7, 1996 and effective February 12, 1996. (Exhibit 3.01 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1995)

3.01–01	–	Statement of Resolution Establishing Series of Preferred Stock, dated February 7, 1996 and effective February 12, 1996, amending Exhibit 3.01. (Exhibit 3.01-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

3.02	–	Bylaws of the Company, dated February 6, 1996. (Exhibit 3.02 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

Exhibit 4 – Instruments Defining the Rights of Security Holders, including Indentures:

4.01	–	General Mortgage Indenture and Deed of Trust, dated as of February 1, 1996, and First Supplemental Indenture, dated as of February 1, 1996, including form of Series A through H First Mortgage Bonds. (Exhibit 4.01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.01-01	–	Second Supplemental Indenture, dated as of August 19, 1997, to Exhibit 4.01. (Exhibit 4.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997)

4.02	–	Reserved.

4.03	–	Indenture of Trust, dated as of July 1, 1994, between Maricopa County, Arizona Pollution Control Corporation and Texas Commerce Bank National Association, as Trustee, related to $63,500,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Adjustable Tender Pollution Control Revenue Bonds, 1994 Series A (El Paso Electric Company Palo Verde Project). (Exhibit 4.01 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.03-01	–	Supplemental Indenture of Trust No. 1, dated as of December 12, 1995, related to Exhibit 4.03, including form of bond. (Exhibit 4.03-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.04	–	Loan Agreement, dated as of July 1, 1994, between Maricopa County, Arizona Pollution Control Corporation and the Company, related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.02 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)


4.04-01	–	Supplemental Loan Agreement No. 1, dated as of February 12, 1996, related to Exhibit 4.04. (Exhibit 4.04-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.05	–	Remarketing Agreement, dated as of July 1, 1994, between the Company and Smith Barney Inc., related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.04 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.05-01	–	Amendment Agreement, dated August 16, 2000, to Exhibits 4.05, 4.11 and 4.21. (Exhibit 4.05-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)

4.06	–	Tender Agreement, dated as of July 1, 1994, between the Company and Smith Barney Inc., related to the Pollution Control Bonds referred to in Exhibit 4.03. (Exhibit 4.05 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.07	–	Ordinance No. 94–1018 adopted by the City Council of the City of Farmington, New Mexico, on October 18, 1994, authorizing and providing for the issuance by the City of Farmington, New Mexico, of $33,300,000 principal amount of its Adjustable Tender Pollution Control Revenue Refunding Bonds, 1994 Series A (El Paso Electric Company Four Corners Project). (Exhibit 4.07 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.07-01	–	Ordinance No. 96–1035 adopted by the City Council of the City of Farmington, New Mexico, on January 23, 1996 as Supplemental Ordinance No. 1, related to Exhibit 4.07. (Exhibit 4.07-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.08	–	Resolution No. 94–798 adopted by the City Council of the City of Farmington, New Mexico, on October 18, 1994, relating to the issuance of the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.08 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.09	–	Amended and Restated Installment Sale Agreement, dated as of November 1, 1994, between the Company and the City of Farmington, New Mexico, relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.09 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.10	–	Representation and Indemnity Agreement, dated as of October 31, 1994, between the Company, the City of Farmington, New Mexico, and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.10 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.11	–	Remarketing Agreement, dated as of November 1, 1994, between the Company and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.11 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)


4.12	–	Tender Agreement, dated as of November 1, 1994, between the Company and Smith Barney Inc., relating to the Pollution Control Bonds referred to in Exhibit 4.07. (Exhibit 4.12 to the Company’s Quarterly Report on Form 10–Q for the quarter ended September 30, 1994)

4.13	–	Reserved.

4.14	–	Loan Agreement, dated as of December 1, 1984, between Maricopa County, Arizona Pollution Control Corporation and the Company, relating to $37,100,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 1984 Series E (El Paso Electric Company Palo Verde Project). (Exhibit 4.27 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1984)

4.14–01	–	Supplemental Loan Agreement, dated as of June 1, 1986, to Exhibit 4.14. (Exhibit 4.29–01 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1986)

4.14-02	–	Supplemental Loan Agreement No. 3, dated as of February 12, 1996, to Exhibit 4.14. (Exhibit 4.14-02 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.15	–	Trust Indenture, dated as of December 1, 1984, by and between Maricopa County, Arizona Pollution Control Corporation and MBank El Paso, National Association, as Trustee, securing the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.27–01 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1984)

4.15–01	–	Supplemental Trust Indenture No. 2, dated as of June 1, 1986, to Exhibit 4.15. (Exhibit 4.29–03 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1986)

4.15–02	–	Supplemental Trust Indenture No. 3, dated as of May 6, 1994, to Exhibit 4.15. (Exhibit 4.01 to the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 1994)

4.15-03	–	Supplemental Trust Indenture No. 4, dated as of November 30, 1995, to Exhibit 4.15, including form of bond. (Exhibit 4.15-03 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1995)

4.16	–	Indexing Agent’s Agreement among Maricopa County, Arizona Pollution Control Corporation, the Company and Smith Barney, Harris Upham & Co., Incorporated, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.27–03 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1984)

4.17	–	Remarketing Agent Agreement, dated as of May 6, 1994, between Smith Barney Shearson Inc., and the Company, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.14. (Exhibit 4.02 to the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 1994)


4.17-01	–	Amendment Agreement, dated August 16, 2000, to Exhibit 4.17. (Exhibit 4.17-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)

4.18	–	Loan Agreement, dated as of February 12, 1996, between Maricopa County, Arizona Pollution Control Corporation and the Company, relating to $59,235,000 principal amount of Maricopa County, Arizona Pollution Control Corporation Pollution Control Refunding Revenue Bonds, 1985 Series A (El Paso Electric Company Palo Verde Project). (Exhibit 4.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.19	–	Indenture of Trust, dated as of February 12, 1996, by and between Maricopa County, Arizona Pollution Control Corporation and Texas Commerce Bank National Association, as Trustee, relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.20	–	Tender Agent Agreement, dated as of February 12, 1996, between the Company and Smith Barney Inc., relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

4.21	–	Remarketing Agent Agreement, dated as of February 12, 1996, between the Company and Smith Barney Inc., relating to the Pollution Control Refunding Revenue Bonds referred to in Exhibit 4.18. (Exhibit 4.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

Exhibit 10 – Material Contracts:

10.01	–	Co–Tenancy Agreement, dated July 19, 1966, and Amendments No. 1 through 5 thereto, between the Participants of the Four Corners Project, defining the respective ownerships, rights and obligations of the Parties. (Exhibit 10.01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.02	–	Supplemental and Additional Indenture of Lease, dated May 27, 1966, including amendments and supplements to original Lease Four Corners Units 1, 2 and 3, between the Navajo Tribe of Indians and Arizona Public Service Company, and including new Lease Four Corners Units 4 and 5, between the Navajo Tribe of Indians and Arizona Public Service Company, the Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company and Tucson Gas & Electric Company. (Exhibit 4–e to Registration Statement No. 2–28692 on Form S-9)

10.02–01	–	Amendment and Supplement No. 1, dated March 21, 1985, to Exhibit 10.02. (Exhibit 19.3 to the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 1985)

10.03	–	El Paso Electric Company 1996 Long-Term Incentive Plan. (Exhibit 4.1 to Registration Statement No. 333-17971 on Form S-8)


10.04	–	Four Corners Project Operating Agreement, dated May 15, 1969, between Arizona Public Service Company, the Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Southern California Edison Company and Tucson Gas & Electric Company, and Amendments 1 through 10 thereto. (Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.04-01	–	Amendment No. 11, dated May 23, 1997, to Exhibit 10.04. (Exhibit 10.04-01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997)

10.05	–	Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, between Arizona Public Service Company, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District, Tucson Gas & Electric Company and the Company, describing the respective participation ownerships of the various utilities having undivided interests in the Arizona Nuclear Power Project and in general terms defining the respective ownerships, rights, obligations, major construction and operating arrangements of the Parties, and Amendments No. 1 through 13 thereto. (Exhibit 10.05 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.06	–	ANPP Valley Transmission System Participation Agreement, dated August 20, 1981, and Amendments No. 1 and 2 thereto. APS Contract No. 2253–419.00. (Exhibit 10.06 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.07	–	Arizona Nuclear Power Project High Voltage Switchyard Participation Agreement, dated August 20, 1981. APS Contract No. 2252–419.00. (Exhibit 20.14 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1981)

10.07–01	–	Amendment No. 1, dated November 20, 1986, to Exhibit 10.07. (Exhibit 10.11–01 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1986)

10.08	–	Firm Palo Verde Nuclear Generating Station Transmission Service Agreement, between Salt River Project Agricultural Improvement and Power District and the Company, dated October 18, 1983. (Exhibit 19.12 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1983)

10.09	–	Trust Agreement, dated as of May 1, 1980, between The Bank of New York, as Beneficiary, and First Security Bank of Utah, N.A., and Robert S. Clark, as Owner Trustees, establishing a trust designated as El Paso Electric Company (1980) Equipment Trust No. 2. (Exhibit 5–p–1 to Registration Statement No. 2–68414 on Form S-7)

10.10	–	Trust Indenture, dated as of May 1, 1980, between The Connecticut Bank and Trust Company, as Indenture Trustee, and First Security Bank of Utah, N.A., and Robert S. Clark, Owner Trustees. (Exhibit 5–p–2 to Registration Statement No. 2–68414 on Form S-7)


10.11	–	Lease Agreement, dated as of May 1, 1980, between First Security Bank of Utah, N.A., and Robert S. Clark, the Owner Trustees, as Lessor, and the Company, as Lessee, providing for the lease of a combustion turbine and related generation equipment. (Exhibit 5–p–3 to Registration Statement No. 2–68414 on Form S-7)

10.12	–	Participation Agreement, dated as of May 1, 1980, among the Company, as Lessee, The Bank of New York, as Beneficiary, First Security Bank of Utah, N.A., and Robert S. Clark, as Owner Trustees, The Connecticut Bank and Trust Company, as Indenture Trustee, Franklin Life Insurance Company, Woodmen of the World Life Insurance Society, Minnesota Mutual Life Insurance Company, MacCabees Mutual Life Insurance Company and Mutual Service Insurance Company, as Lenders, pertaining to Exhibit 10.11. (Exhibit 5–p–4 to Registration Statement No. 2–68414 on Form S-7)

10.13	–	Interconnection Agreement, as amended, dated December 8, 1981, between the Company and Southwestern Public Service Company, and Service Schedules A through F thereto. (Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.13-01	–	Letter Agreement, dated December 19, 1996, modifying Service Schedule E, relating to Exhibit 10.13. (Exhibit 10.13-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996)

10.14	–	Amrad to Artesia 345 KV Transmission System and DC Terminal Participation Agreement, dated December 8, 1981, between the Company and Texas–New Mexico Power Company, and the First through Third Supplemental Agreements thereto. (Exhibit 10.14 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1995)

10.15	–	Interconnection Agreement and Amendment No. 1, dated July 19, 1966, between the Company and Public Service Company of New Mexico. (Exhibit 19.01 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1982)

10.16	–	Southwest New Mexico Transmission Project Participation Agreement, dated April 11, 1977, between Public Service Company of New Mexico, Community Public Service Company and the Company, and Amendments 1 through 5 thereto. (Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.16-01	–	Amendment No. 6, dated as of June 17, 1999, to Exhibit 10.16. (Exhibit 10.09 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)

10.17	–	Tucson–El Paso Power Exchange and Transmission Agreement, dated April 19, 1982, between Tucson Electric Power Company and the Company. (Exhibit 19.26 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1982)


10.18	–	Southwest Reserve Sharing Group Participation Agreement, dated January 1, 1998, between the Company, Arizona Electric Power Cooperative, Arizona Public Service Company, City of Farmington, Los Alamos County, Nevada Power Company, Plains Electric G&T Cooperative, Inc., Public Service Company of New Mexico, Tucson Electric Power and Western Area Power Administration. (Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997)

10.19	–	Power Sales Agreement No. 2, dated December 2, 1986, between the Company and Imperial Irrigation District, and Amendment No. 1 thereto. (Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.20	–	Arizona Nuclear Power Project Transmission Project Westwing Switchyard Amended Interconnection Agreement, dated August 14, 1986, between The United States of America; Arizona Public Service Company; Department of Water and Power of the City of Los Angeles; Nevada Power Company; Public Service Company of New Mexico; Salt River Project Agricultural Improvement and Power District; Tucson Electric Power Company; and the Company. (Exhibit 10.72 to the Company’s Annual Report on Form 10–K for the year ended December 31, 1986)

10.21	–	Power Sales Agreement, dated April 29, 1987, between the Company and Texas–New Mexico Power Company, and Amendment No. 1 thereto. (Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.22	–	Form of Indemnity Agreement, between the Company and its directors and officers. (Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.23	–	Interchange Agreement, executed April 14, 1982, between Comision Federal de Electricidad and the Company. (Exhibit 19.2 to the Company’s Quarterly Report on Form 10–Q for the quarter ended June 30, 1991)

10.24	–	Credit Agreement, dated as of February 12, 1996, as amended and restated as of February 8, 1999, between the Company, Chase Manhattan Bank, as agent, and Chase Bank of Texas, National Association, as Trustee. (Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998)

10.24-01	–	Amendment Agreement, dated as of February 8, 1999, to Exhibit 10.24. (Exhibit 10.24-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998)

10.25	–	Restricted Stock Award Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.02 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996)

10.26	–	Stock Option Agreement, dated as of December 15, 2000, with James S. Haines, Jr. (Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)


10.27	–	Employment Agreement for James S. Haines, Jr., dated April 30, 1996. (Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996)

10.27-01	–	Amendment No. 1, dated as of December 15, 2000, to Exhibit 10.27. (Exhibit 10.27-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)

10.28	–	Restatement of Decommissioning Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen’s Trust Company of Texas, as Decommissioning Trustee for Palo Verde Unit 1. (Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.29	–	Restatement of Decommissioning Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen’s Trust Company of Texas, as Decommissioning Trustee for Palo Verde Unit 2. (Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.30	–	Restatement of Decommissioning Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen’s Trust Company of Texas, as Decommissioning Trustee for Palo Verde Unit 3. (Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.31	–	Spent Fuel Trust Agreement, dated as of February 12, 1996, between the Company and Boatmen’s Trust Company of Texas, as Spent Fuel Trustee. (Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.32	–	Trust Agreement, dated as of February 12, 1996, between the Company and Texas Commerce Bank National Association, as Trustee of the Rio Grande Resources Trust II. (Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.33	–	Purchase Contract, dated as of February 12, 1996, between the Company and Texas Commerce Bank National Association, as Trustee of the Rio Grande Resources Trust II. (Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995)

10.34	–	Employment Agreement for Helen Knopp, dated April 30, 1999. (Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999)

10.35	–	Employment Agreement for Earnest A. Lehman, dated January 5, 1999. (Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998)

10.36	–	Form of Change of Control Agreement between the Company and certain key officers of the Company. (Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999)


†10.37	–	Form of Restricted Stock Award Agreement between the Company and certain key officers of the Company. (Exhibit 99.04 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)

10.38	–	Form of Stock Option Agreement between the Company and certain key officers of the Company. (Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)

††10.39	–	Form of Directors’ Restricted Stock Award Agreement between the Company and certain directors of the Company. (Exhibit 10.07 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)

†††10.40	–	Form of Stock Option Agreement between the Company and certain directors of the Company. (Exhibit 99.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997)

10.41	–	Stock Option Agreement, dated as of April 26, 1999, with James S. Haines, Jr. (Exhibit 10.05 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)

10.42	–	Stock Option Agreement, dated as of January 17, 1997, with James S. Haines, Jr. (Exhibit 99.03 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996)

10.42-01	–	Amendment No. 1, dated April 30, 1997, to Exhibit 10.42. (Exhibit 99.03-01 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997)

10.43	–	El Paso Electric Company 1999 Long-Term Incentive Plan. (Exhibit 4.1 to Registration Statement No. 333-82129 on Form S-8)

10.44	–	Settlement Agreement, dated as of February 24, 2000, with the City of Las Cruces. (Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000)

10.45	–	Franchise Agreement, dated April 3, 2000, between the Company and the City of Las Cruces. (Exhibit 10.02 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000)

10.46	–	Stock Option Agreements, dated as of January 1, 2001 and April 1, 2001, with Wilson K. Cadman. (Identical in all material respects to Exhibit 99.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997) (Exhibit 10.03 to Company’s Quarterly Report on Form 10-Q for quarter ended March 31, 2001)

10.47	–	Form of Directors’ Restricted Stock Award Agreement, dated as of May 10, 2001, between the Company and George W. Edwards, Jr. (Identical in all material respects to Exhibit 10.07 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999) (Exhibit 10.04 to Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2001)


10.48	–	Form of Change of Control Agreement, dated as of April 23, 2001, between the Company and Hector Puente. (Identical in all material respects to Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999) (Exhibit 10.06 to Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2001)

10.49	–	Employment Agreement for Hector Puente, dated April 23, 2001. (Exhibit 10.07 to Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2001)

10.50	–	Form of Stock Option Agreement, dated as of April 23, 2001, between the Company and Hector Puente. (Identical in all material respects to Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) (Exhibit 10.08 to Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2001)

10.51	–	Stock Option Agreement, dated as of July 1, 2001, with Wilson K. Cadman. (Identical in all material respects to Exhibit 99.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997) (Exhibit 10.09 to Company’s Quarterly Report on Form 10-Q for quarter ended September 30, 2001)

10.52	–	Stock Option Agreement, dated as of October 1, 2001, with Mr. Wilson K. Cadman. (Identical in all material respects to Exhibit 99.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997)

10.53	–	Stock Option Agreement, dated as of November 5, 2001, with Gary R. Hedrick. (Identical in all material respects to Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)

10.54	–	Stock Option Agreement, dated as of November 12, 2001, with Terry Bassham. (Identical in all material respects to Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)

10.55	–	Stock Option Agreement, dated as of November 26, 2001, with Julius F. Bates. (Identical in all material respects to Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)

††10.56	–	Directors’ Restricted Stock Award Agreement, between the Company and certain directors of the Company. (Identical in all material respects to Exhibit 10.07 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)

10.57	–	Restricted Stock Award Agreement with Mr. James S. Haines, Jr. (Identical in all material respects to Exhibit 99.04 to the Company’s Quarterly Report on Form 10–Q for the quarter ended March 31, 1998)

10.58	–	Restricted Stock Award Agreement, dated as of November 8, 2001 between the Company and for Mr. Gary R. Hedrick. (Identical in all material respects to Exhibit 99.04 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)


*10.59	–	Interconnection Agreement effective December 26, 2001, between El Paso Electric Company, Public Service Company of New Mexico, Texas—New Mexico Power Company, and Duke Energy Luna, LLC.

*10.60	–	Credit Agreement dated as of February 12, 1996, as amended and restated as of February 8, 1999 and January 28, 2002, among the Company, JPMorgan Chase Bank as Trustee, the lenders party hereto and JPMorgan Chase Bank, as Administrative Agent, Collateral Agent, and Issuing Bank.

Exhibit 21 – Subsidiaries of the Company:

21.01	–	MiraSol Energy Services, Inc., a Delaware corporation

Exhibit 23 – Consent of Experts:

*23.01	–	Consent of KPMG LLP (set forth on page 93 of this report)

Exhibit 24 – Power of Attorney:

*24.01	–	Power of Attorney (set forth on page 92 of this report)

*24.02	–	Certified copy of resolution authorizing signatures pursuant to power of attorney

Exhibit 99 – Additional Exhibits:

99.01	–	Agreed Order, entered August 30, 1995, by the Public Utility Commission of Texas. (Exhibit 99.31 to Registration Statement No. 33–99744 on Form S-1)

99.02	–	Stock Option Agreement, dated as of January 17, 1997, with David H. Wiggs, Jr. (Exhibit 99.04 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996)

99.03	–	Final Order, entered September 24, 1998, by the New Mexico Public Utility Commission. (Exhibit 99.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998)

99.04	–	Final Order, entered June 8, 1999, by the Public Utility Commission of Texas. (Exhibit 99.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)

*99.05	–	Final Order, entered January 8, 2002, by the New Mexico Public Utility Commission.

Filed herewith.

†

Twelve agreements, dated as of February 28, 2001, substantially identical in all material respects to this Exhibit, have been entered into with Terry D. Bassham; J. Frank Bates; Michael L. Blough; Gary R. Hedrick; Kathryn Hood; John C. Horne; Helen Williams Knopp; Earnest A. Lehman; Kerry B. Lore; Robert C. McNiel; Eduardo A. Rodriguez; and Guillermo Silva, officers of the Company.

††

In lieu of non-employee director compensation, four agreements, dated as of October 1, 2000, substantially identical in material respects to this Exhibit, have been entered into with Kenneth R. Heitz; Ramiro Guzman; Patricia Z. Holland-Branch; and Charles A. Yamarone, directors of the Company.

In lieu of non-employee director compensation, eight agreements, dated as of January 1, 2001 and April 1, 2001, substantially identical in material respects to this Exhibit, have been entered into with Ramiro Guzman; Kenneth R. Heitz; Patricia Z. Holland-Branch; and Charles A. Yamarone, directors of the Company.

Twelve agreements, dated as of May 10, 2001, substantially identical in all material respects to this Exhibit, were entered into with George W. Edwards, Jr.; Ramiro Guzman; James W. Harris; Kenneth R. Heitz; James W. Cicconi; Patricia Z. Holland-Branch; Michael K. Parks; Eric B. Siegel; Stephen Wertheimer; Charles A. Yamarone; James A. Cardwell; and Wilson K. Cadman, directors of the Company.

Three agreements, dated October 1, 2001, substantially identical in all material respects to this Exhibit, were entered into with Kenneth R. Heitz; Patricia Z. Holland-Branch; Charles A. Yamarone, directors of the Company.

†††

One agreement, dated as of October 1, 2000, substantially identical in all material respects to this Exhibit, has been entered into with Wilson K. Cadman, a director of the Company.

(b)

Reports on Form 8-K:

The following reports on Form 8-K were filed during the last quarter of 2001.

Date of Report	Item Number	Financial Statements Required to be Filed

None

UNDERTAKING

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of El Paso Electric Company, a Texas corporation, and the undersigned directors and officers of El Paso Electric Company, hereby constitutes and appoints Gary R. Hedrick, Terry Bassham, J. Frank Bates, Raul A. Carrillo, Jr. and Guillermo Silva, Jr., its, his or her true and lawful attorneys–in–fact and agents, for it, him or her and its, his or her name, place and stead, in any and all capacities, with full power to act alone, to sign this report and any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys–in–fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as it, he or she might or could do in person, hereby ratifying and confirming all that said attorneys–in–fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March 2002.

EL PASO ELECTRIC COMPANY

By:		/s/ G ARY R. H EDRICK
		Gary R. Hedrick President and Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature	Title	Date

/s/ G ARY R. H EDRICK ( Gary R. Hedrick)	President and Chief Executive Officer (Principal Executive Officer) and Director	March 26, 2002

/s/ T ERRY B ASSHAM (Terry Bassham)	Executive Vice President, Chief Financial and Administrative Officer (Principal Financial Officer)	March 26, 2002

/s/ W ILSON K. C ADMAN (Wilson K. Cadman)	Director	March 26, 2002

/s/ J AMES A. C ARDWELL ( James A. Cardwell)	Director	March 26, 2002

/s/ J AMES W. C ICCONI (James W. Cicconi)	Director	March 26, 2002

/s/ G EORGE W. E DWARDS , J R . (George W. Edwards, Jr.)	Director	March 26, 2002

/s/ R AMIRO G UZMAN (Ramiro Guzman)	Director	March 26, 2002

/s/ J AMES H AINES (James Haines)	Director	March 26, 2002

/s/ J AMES W. H ARRIS ( James W. Harris)	Director	March 26, 2002

/s/ K ENNETH R. H EITZ (Kenneth R. Heitz)	Director	March 26, 2002

/s/ P ATRICIA Z. H OLLAND -B RANCH (Patricia Z. Holland-Branch)	Director	March 26, 2002

/s/ M ICHAEL K. P ARKS (Michael K. Parks)	Director	March 26, 2002

/s/ E RIC B. S IEGEL (Eric B. Siegel)	Director	March 26, 2002

/s/ S TEPHEN W ERTHEIMER (Stephen Wertheimer)	Director	March 26, 2002

/s/ C HARLES A. Y AMARONE (Charles A. Yamarone)	Director	March 26, 2002

Exhibit 10.59

Service Agreement No. 40

under El Paso Electric Company FERC Electric Tariff

Original Volume No. 1

Interconnection Agreement between El Paso Electric Company,

Public Service Company of New Mexico,

Texas-New Mexico Power Company, and Duke Energy Luna, LLC

Effective Date: December 26, 2001

EXHIBIT B

TABLE OF CONTENTS

ARTICLE I D EFINITIONS		2
ARTICLE II T ERM		9
2.1	Effectiveness of this Agreement	9
2.2	FERC Filing	9
2.3	Term	10
2.4	Material Adverse Change	10
2.5	Survival	10
ARTICLE III C ONTINUING O BLIGATIONS AND R ESPONSIBILITIES		10
3.1	Interconnection Service Provided	10
3.2	Scope of Interconnection Service	10
3.3	Services Outside Scope of Agreement	11
3.4	No Guarantees; Release	12
3.5	Reporting Requirements	12
3.6	Third Party Activity	12
3.7	Compliance with Utilities' OATTs and FERC Orders No. 888 and No. 889	13
ARTICLE IV O PERATING C OMMITTEE		13
4.1	Operating Committee	13
4.2	Responsibilities of the Operating Committee	13
4.3	Effectiveness of Operating Committee Determinations	13
ARTICLE V F ACILITY I NTERCONNECTION		13
5.1	Establishment of Interconnection	14
5.2	Necessary Easements, Permits, Licenses, Etc	14
5.3	Design and Construction of Generator's Interconnection Facilities	14
5.4	Design and Construction of Luna Interconnection Facilities and Interconnection System Upgrades	15
5.5	Subcontractors	17
5.6	Rights of Access	17
5.7	Completion of Construction	18
5.8	Timely Completion	18
5.9	Environmental Compliance and Procedures	19
5.10	Generator Modeling Data	19

5.11	Equipment Requirements	19
5.12	Required Diagrams	19
5.13	Required Personnel Information	20
5.14	Use of Interconnected Facilities by Third Parties	20
5.15	Facility Modifications	21
5.16	Generator's Connection at Luna Substation	22
ARTICLE VI A CCEPTANCE AND P ERFORMANCE T ESTING AND C OMPLIANCE M ONITORING		23
6.1	Responsibility for Testing	23
6.2	Responsibility for Modifications Following Testing	24
6.3	Documentation of Results to the Project Manager or the Operating Agent	24
6.4	Facility Certification	24
6.5	Transmission Service During Testing	24
6.6	Luna Substation Owners Inspection Rights	24
6.7	Generator Inspection Rights	25
6.8	Luna Substation Owners Reviews, Inspections, and Approvals	25
ARTICLE VII I NTERCONNECTION F ACILITY C OSTS AND B ILLING		25
7.1	Interconnection Construction Completion and Cost	25
7.2	Invoices and Payments	26
7.3	Adjustments	28
7.4	Payment Not a Waiver	28
7.5	Income Taxes	28
ARTICLE VIII O PERATIONS		29
8.1	General	29
8.2	Obligations of Utilities and Operating Agent	29
8.3	Obligations of Generator	29
8.4	Reliability Criteria	30
8.5	Quality of Power	30
8.6	Protection and System Quality	31
8.7	Adjustments	32
8.8	Interconnected Operation Services	32
8.9	Switching and Tagging Procedures	32

8.10	General Orders	33
8.11	Generation Alert	33
ARTICLE IX R ELIABILITY M ANAGEMENT S YSTEM		33
9.1	Purpose	33
9.2	Compliance	33
9.3	Participant Status	33
9.4	Payment of Sanctions	34
9.5	Transfer of Control or Sale of Facility	34
9.6	Failure to Comply with RMS	34
9.7	Publication	34
9.8	Third Parties	34
9.9	Reserved Rights	35
9.10	Termination	35
9.11	Mutual Agreement	35
9.12	Severability	35
ARTICLE X R EACTIVE P OWER		35
10.1	Obligation to Supply Reactive Power	35
10.2	Compensation	35
10.3	Reactive Power Standards	36
10.4	Failure to Supply Reactive Power	36
ARTICLE XI O UTAGES , I NTERRUPTIONS , AND D ISCONNECTIONS		36
11.1	Outage Scheduling	36
11.2	Scheduled Maintenance and Coordination	37
11.3	Other Maintenance and Coordination	37
11.4	Unplanned Outages	37
11.5	Disconnection	37
11.6	Continuity of Service	38
ARTICLE XII E MERGENCY AND A BNORMAL C ONDITION P ROCEDURES		38
12.1	Emergency	38
12.2	Notice of Emergency	39
12.3	Immediate Action	39
12.4	Disconnection of Facility in Event of Potential Emergency	40

iii

12.5	Audit Rights	40
12.6	Abnormal Conditions	40
ARTICLE XIII M AINTENANCE		41
13.1	The Operating Agent Obligations	41
13.2	Generator Obligations	41
13.3	Maintenance Expenses	41
13.4	Coordination	41
13.5	Observation of Deficiencies	42
13.6	Review of Maintenance Records	42
ARTICLE XIV M ETERING		42
14.1	General	42
14.2	Testing	42
14.3	Data Metered	43
14.4	Data Available Upon Request	43
14.5	Costs	43
ARTICLE XV S AFETY		43
15.1	General	43
15.2	Environmental Releases	43
15.3	Other Environmental Impact	43
ARTICLE XVI C OMMUNICATIONS		44
16.1	Equipment	44
16.2	Remote Terminal Unit	44
ARTICLE XVII I NFORMATION R EPORTING		44
17.1	General	44
17.2	Compliance Monitoring Reporting	44
17.3	Regulatory Agency Reporting	44
17.4	Penalties	45
ARTICLE XVIII D OCUMENTATION		45
18.1	General	45
18.2	Drawings	45
ARTICLE XIX F ORCE M AJEURE		45
19.1	Definition	45


19.2	Performance Excused	46

19.3	Labor Issues	46

19.4	Payment Not Excused	46

ARTICLE XX I NDEMNIFICATION		46

20.1	INTERCONNECTION INDEMNITY	46

20.2	RECIPROCAL INDEMNITY	47

20.3	DAMAGE DISCLAIMER	47

20.4	Indemnities Reformed	47

20.5	Indemnification Procedures	48

20.6	Additional Indemnification Provisions	48

20.7	Survival	48

ARTICLE XXI I NSURANCE		48

21.1	Generator	48

21.2	Owners	49

21.3	Notice of Cancellation	49

21.4	Self-Insurance	49

ARTICLE XXII D EFAULT		50

22.1	General	50

22.2	Events Constituting Breach	50

22.3	Notice by Breaching Party	51

22.4	Cure and Default	51

22.5	Continued Operations	51

22.6	Upon Default	51

22.7	Generator's Default in Payment for Equipment	52

ARTICLE XXIII T ERMINATION		52

23.1	Expiration of Term	52

23.2	Termination in the Event of Default	52

23.3	Survival	52

23.4	Disconnection and Disposition of Facilities Upon Termination	52

ARTICLE XXIV C REDITWORTHINESS		53

ARTICLE XXV R ELATIONSHIP OF THE P ARTIES		53

25.1	General	53


25.2	Luna Substation Owners	53

ARTICLE XXVI R EPRESENTATIONS AND W ARRANTIES		53

26.1	Representations of EPE	53

26.2	Representations of PNM	54

26.3	Representations of TNMP	55

26.4	Representations of Generator	56

26.5	Representations of Each Party	57

ARTICLE XXVII A SSIGNMENT		57

27.1	General	57

27.2	EPE	57

27.3	PNM	57

27.4	TNMP	57

27.5	Generator	58

27.6	No Relief in Event of Assignment	58

ARTICLE XXVIII C ONFIDENTIALITY		58

28.1	General	58

28.2	Scope	58

28.3	Rights in Confidential Information	58

28.4	Standard of Care	59

28.5	Required Disclosures	59

28.6	Possession of Confidential Information at Termination of Agreement	59

28.7	Remedies Regarding Confidentiality	59

ARTICLE XXIX D ISPUTE R ESOLUTION		59

29.1	Dispute Resolution by Operating Committee	59

29.2	Dispute Resolution by Senior Management	59

29.3	Arbitration	60

29.4	FERC Jurisdiction Over Certain Disputes	61

29.5	Continued Performance	62

ARTICLE XXX M ISCELLANEOUS		62

30.1	Partial Invalidity	62

30.2	Successors Included	62

30.3	Applicable Laws and Regulations	62


30.4	Choice of Law and Jurisdiction	62

30.5	Entire Agreement	62

30.6	Counterparts to this Agreement	62

30.7	Amendments	62

30.8	Amendments Included	63

30.9	Notices	63

30.10	Waivers	64

30.11	No Third Party Beneficiaries	65

30.12	Further Assurances	65

30.13	Headings	65

30.14	Articles	65

30.15	Number, Gender, and Inclusion	65

30.16	Good Utility Practice	65

30.17	Succession Upon Membership in an RTO	65

30.18	Notification of Change of Operating Agent	65

vii

INTERCONNECTION AGREEMENT

This Interconnection Agreement (as defined below, “Agreement”) is made and entered into as of this 21st day of December, 2001, by and between El Paso Electric Company (“EPE”), a corporation organized under the laws of the State of Texas; Public Service Company of New Mexico (“PNM”), a corporation organized under the laws of the State of New Mexico; Texas-New Mexico Power Company (“TNMP”), a corporation organized under the laws of the State of Texas; and Duke Energy Luna, LLC (“Generator”), a limited liability company organized under the laws of the State of Delaware.

W I T N E S S E T H

WHEREAS, EPE is engaged in the transmission and distribution of electric energy in the States of New Mexico and Texas;

WHEREAS, PNM is engaged in the transmission and distribution of electric energy in the State of New Mexico;

WHEREAS, TNMP is engaged in the transmission and distribution of electric energy in the States of Texas and New Mexico;

WHEREAS, EPE, PNM and TNMP own the Southwest New Mexico Transmission Project;

WHEREAS, EPE, PNM and TNMP own the Luna Substation located near Deming, New Mexico;

WHEREAS, Generator will own and operate an electric generating facility (as defined below, “Facility”) located near Deming, New Mexico;

WHEREAS, the Facility is located adjacent to the Luna Substation;

WHEREAS, Generator seeks to interconnect with the Southwest New Mexico Transmission Project at the Luna Substation;

WHEREAS, this Agreement does not provide for transmission, distribution or ancillary services and separate arrangements are required for such services; and

WHEREAS, EPE, PNM, TNMP, and Generator have agreed to execute an interconnection agreement to interconnect the Facility with the Southwest New Mexico Transmission Project at the Luna Substation.

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the Parties agree as follows:

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ARTICLE I

D EFINITIONS

For purposes of this Agreement, the following terms shall have the following meanings.

1.1 “ Abnormal Condition ” means any condition at the Facility, on the Interconnected Facilities, at the Luna Substation, on any of the Utilities’ Transmission Systems, or on the transmission system of other utilities which is outside normal operating parameters such that facilities are operating outside their normal ratings or reasonable operating limits have been exceeded but which has not resulted in an Emergency, including high or low deviations in: voltage, frequency, power flow, equipment temperature, equipment pressures, and other equipment and operating parameters.

1.2 “Affiliate” means, with respect to any Person, any other Person (other than an individual) that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. For this purpose, “control” means the direct or indirect ownership of fifty percent (50%) or more of the outstanding capital stock or other equity interests having ordinary voting power.

1.3 “Agents” means the officers, directors, shareholders, employees or agents acting on behalf of a Party or group of Parties.

1.4 “Agreement” means this Interconnection Agreement between EPE, PNM, TNMP and Generator, including attachments, exhibits, and appendices.

1.5 “Applicable Laws and Regulations” means all applicable federal, state and local laws, codes, ordinances, rules and regulations, and all duly promulgated orders and other duly authorized actions, as amended from time to time, and whether now existing or hereafter enacted, promulgated, entered or otherwise arising, of any Governmental Authority having jurisdiction over the Parties and/or their respective facilities.

1.6 “Bankruptcy Laws” shall have the meaning set forth in Article 22.2(c).

1.7 “Breaching Party” shall have the meaning set forth in Article 22.2.

1.8 “Business Day” means any day on which the Federal Reserve member banks are open for business. A Business Day shall commence at 8:00 a.m. and close at 5:00 p.m., local time, at the location of the relevant Party’s principal place of business, or at such other location as the context may require. The relevant Party, in each instance unless otherwise specified, shall be the Party to which the notice, payment, or delivery is being sent and by which the notice, payment, or delivery is being received.

1.9 “Commercial Operation Date” means the first day on which the Facility generates electric energy, other than test energy, for sale.

1.10 “Commercially Reasonable Efforts” means efforts by a Party to perform the particular obligation under this Agreement using skills, time and funds which are customary and

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reasonable in transactions of the kind and nature contemplated by this Agreement in order for such Party to satisfy such obligation under this Agreement.

1.11 “Confidential Information” means any confidential, proprietary, or trade secret information associated with a plan, specification, pattern, procedure, design, device, list, concept, policy, or compilation relating to the present or planned business of a Party (including all information relating to a Party’s technology, research and development, business affairs and pricing), which is designated as “Confidential” by the Party supplying the information, whether conveyed orally, in writing, electronically, through inspection, or otherwise prior to or after the Effective Date. Any Confidential Information designated as such by a Party that is conveyed in writing or electronically must clearly be designated or marked as confidential on the face of the document or electronic transmission. To the extent that the Confidential Information is designated as such by a Party orally or through inspection, the Party providing such information must inform the Party receiving such information that it is Confidential Information.

1.12 “Custodian” shall have the meaning set forth in Article 22.2(c).

1.13 “Due Diligence” means the exercise of good faith efforts to perform a required act on a timely basis and in accordance with Good Utility Practice using the necessary technical resources and personnel.

1.14 “Effective Date” means the date set forth in Article 2.1 of this Agreement.

1.15 “Emergency” means (a) a condition or situation which, in the judgment of the Operating Agent, requires immediate manual or automatic action to prevent (i) endangerment of life or property, or (ii) uncontrolled loss of firm load, equipment damage, or tripping of system elements that could adversely affect the reliability of the Luna Substation, the SWNMT, any of the Utilities’ Transmission Systems or the transmission systems of others to which a Utility’s Transmission System is directly or indirectly connected, and which requires that the output of the Facility be adjusted to help avoid or mitigate such condition or situation, and/or (b) a condition or situation which Generator deems imminently likely to (i) endanger life or property, or (ii) adversely affect or impair the reliability of the Facility.

1.16 “Environmental Laws” means federal, state, and local laws, regulations, rules, ordinances, codes, decrees, judgments, directives, or judicial or administrative orders (and any amendments thereto) relating to pollution or protection of the environment, archaeological or natural resources, or human health and safety, including laws relating to exposures, Releases or threatened Releases of Hazardous Substances (including Releases or threatened Releases to ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport, or handling of Hazardous Substances.

1.17 “EPE” shall have the meaning set forth in the first paragraph of this Agreement.

1.18 “EPE OATT” means EPE’s Open Access Transmission Tariff filed with FERC in accordance with FERC’s Order No. 888, and any successor transmission service tariff

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thereto, including any such successor tariff of a Regional Transmission Organization to which EPE transfers operating authority over the EPE Transmission System.

1.19 “EPE Transmission System” means all of the facilities owned by EPE that are made available for the purpose of providing transmission service under the EPE OATT.

1.20 “Facility” means Generator’s electric generating facility with a nominal rating of approximately 600 MW located near Deming, New Mexico, together with the other property, facilities, and equipment owned and/or operated by Generator up to and including the high-side breakers and switches connected to the generator step-up transformers.

1.21 “Federal Power Act” means the Federal Power Act, 16 U.S.C. § 791a et seq., as amended from time to time.

1.22 “FERC” means the Federal Energy Regulatory Commission, or any successor federal agency.

1.23 “General Orders” means the set of standard operating procedures, as modified from time to time, by which the Operating Agent operates the transmission system and which are applicable to generating facilities connected to that transmission system, including, at the Effective Date, the Facility.

1.24 “Generator” shall have the meaning set forth in the first paragraph of this Agreement.

1.25 “Generator’s Interconnection Facilities” means all equipment and other facilities owned, operated and maintained by Generator, from the high-side breakers and switches connected to the generator step-up transformers to the change in ownership point indicated on Appendix D, including any modifications, additions, or upgrades made to such facilities, which, in conjunction with the Luna Interconnection Facilities, are necessary to connect the Facility to the Southwest New Mexico Transmission Project at the Luna Substation.

1.26 “Good Utility Practice” means any of the practices, methods, and acts required, approved, or engaged in by the WSCC, NERC, RTO (if applicable) or a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act; rather, it is intended to be a spectrum of practices, methods, and acts generally accepted by the electric utility industry in the WSCC region. Good Utility Practice shall include compliance with Applicable Laws and Regulations.

1.27 “Governmental Authority” means any entity with proper jurisdiction or authority over the Parties and/or their respective facilities, including (i) a federal, tribal, state, local or municipal governmental body; (ii) a governmental, regulatory or administrative agency, commission, body or other authority exercising or entitled to exercise administrative,

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executive, judicial, legislative, policy, regulatory or taxing authority or power; and (iii) a court or governmental tribunal.

1.28 “Governor Droop” means the governor response characteristic (speed versus output characteristic) defining the decrease in frequency needed to cause generator output to go from no load to full load.

1.29 “Hazardous Substances” means (a) any petrochemical or petroleum products, oil, coal ash, radioactive materials, radon gas, asbestos in any form that is or could be friable, urea formaldehyde foam insulation and transformers or other equipment that contains dielectric fluid that may contain polychlorinated biphenyls; (b) any chemicals, materials, or substances defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,” “hazardous constituents,” “restricted hazardous materials,” “extremely hazardous substances,” “toxic substances,” “contaminants,” “pollutants,” “toxic pollutants,” or words of similar meaning and regulatory effect under any applicable Environmental Law; or (c) any other chemical, material, or substance, exposure to which is prohibited, limited, or regulated by any applicable Environmental Law.

1.30 “Interconnected Facilities” means the Luna Interconnection Facilities and Generator’s Interconnection Facilities.

1.31 “Interconnection Point” means the point at which the Facility is connected to the Luna Substation as indicated on Appendix D.

1.32 “Interconnection Service” means the service provided by EPE, PNM and TNMP to interconnect the Facility with the Southwest New Mexico Transmission Project at the Luna Substation. Interconnection Service does not mean or include transmission service, ancillary services, losses, or any service other than interconnection available under the EPE OATT, PNM OATT or TNMP OATT.

1.33 “Interconnection Studies” means the studies performed by or on behalf of the Luna Substation Owners pursuant to an interconnection request by Generator which have determined the design, specifications and cost estimate for the Interconnected Facilities and any Interconnection System Upgrades required to accommodate the interconnection of the Facility.

1.34 “Interconnection System Upgrades” means the necessary upgrades, if any, to the EPE Transmission System, the PNM Transmission System and/or the TNMP Transmission System that would not have been required but for the interconnection of the Facility to the Southwest New Mexico Transmission Project at the Luna Substation and identified in Appendix B.

1.3 5 “Interest Rate” means the prime interest rate for currency as published from time to time under “Money Rates” by The Wall Street Journal, or its successor (or, if no longer so published, any substitute mutually agreeable to the Parties), as of the payment due date and/or default date, plus two (2) percent; provided, however, that in no event shall the

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Interest Rate exceed the maximum interest rate permitted by Applicable Laws and Regulations.

1.36 “Luna Interconnection Facilities” means all equipment and other facilities owned by EPE, PNM and/or TNMP, either individually or collectively, and maintained by the Operating Agent, from the change in ownership point indicated in Appendix D to the existing Luna Substation facilities, including any modifications, additions, or upgrades made to such facilities, which, in conjunction with the Generator’s Interconnection Facilities, are necessary to connect the Facility to the Southwest New Mexico Transmission Project at the Luna Substation.

1.37 “Luna Substation” means the 345 kV substation owned by EPE, PNM and TNMP located near Deming, New Mexico as depicted in Appendix D. Certain facilities at the Luna Substation are part of the SWNMT. The remaining facilities are owned by EPE, PNM and TNMP separately from the SWNMT.

1.38 “Luna Substation Owners” means EPE, PNM and TNMP, in their capacity as owners of the Luna Substation, or their respective successors and permitted assignees.

1.39 “Metering Equipment” means all metering equipment to be installed at the Facility and at or near the Interconnection Point. Metering Equipment is identified in Appendices A, B and D.

1.40 “NERC” means the North American Electric Reliability Council, or any successor organization.

1.41 “Non-Breaching Party” shall have the meaning set forth in Article 22.2(g).

1.42 “Operating Agent” shall mean the Utility that operates the Luna Substation and, as a result, the Luna Interconnection Facilities, pursuant to the letter agreement entitled “Transfer of Operating Agent for SWNMT”, dated September 6, 1995 between EPE, PNM and TNMP. On the Effective Date of this Agreement, EPE is the Operating Agent for the Luna Substation and the Luna Interconnection Facilities.

1.43 “Operating Committee” shall have the meaning set forth in Article 4.1.

1.44 “Operation Date” means the day upon which the Interconnected Facilities and Facility have been completed to the Project Manager’s and Generator’s mutual satisfaction and energized in parallel operation as confirmed in a written notice provided by the Project Manager to Generator.

1.45 “Participant” has the meaning as stated in Article 9.3.

1.46 “Parties” means EPE (including in its capacities as Project Manager and Operating Agent), PNM, TNMP, and Generator or the successor or permitted assignee of the rights and obligations of any of the foregoing under this Agreement. “Party” means one of the Parties.

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1.47 “Person” means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or a government or any political subdivision or agency thereof.

1.48 “PNM” shall have the meaning set forth in the first paragraph of this Agreement.

1.49 “PNM OATT” means PNM’s Open Access Transmission Tariff filed with FERC in accordance with FERC’s Order No. 888, and any successor transmission service tariff thereto, including any such successor tariff of a Regional Transmission Organization to which PNM transfers operating authority over the PNM Transmission System.

1.50 “PNM Transmission System ” means all of the facilities owned by PNM that are made available for the purpose of providing transmission service under the PNM OATT.

1.51 “Power System Stabilizer (PSS)” means a control system applied at a generator that monitors variables such as current, voltage and shaft speed and sends the appropriate control signals to the voltage regulator to damp system oscillations.

1.52 “Project Manager” means the Party responsible for the design and construction of the Luna Interconnection Facilities. On the Effective Date of this Agreement, EPE is the Project Manager.

1.53 “Protective Equipment” means such protective relay systems, locks and seals, breakers, automatic synchronizers, associated communication equipment and other control schemes and protective apparatus as is reasonably necessary under Good Utility Practice and technical standards of the Luna Substation Owners for the operation of the Facility in parallel with the transmission system and to permit the facilities of EPE, PNM, TNMP and the Facility to operate reliably and safely.

1.54 “Regional Transmission Organization” or “RTO” means an entity approved by FERC to assume responsibility for providing electric transmission services and certain operational functions in a specific region in accordance with FERC Order No. 2000.

1.55 “Release” means any release, spill, leak, discharge, disposal, pumping, pouring, emission, emptying, injection, leaching, dumping, escape into or through the environment of any Hazardous Substance.

1.56 “Reliability Management System” or “RMS” means the contractual reliability management program implemented through the WSCC Reliability Criteria Agreement, Article IX of this Agreement, and any similar contractual arrangement(s).

1.57 “Security Coordinator” means the entity authorized by WSCC to have the final authority to direct electric system operations to prevent or remedy problems or disturbances that have regional impacts.

1.58 “SOCC” means System OPerations Control Center.

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1.59 “Southwest New Mexico Transmission Project” or “SWNMT” means the transmission lines and associated facilities constructed and operated by the SWNMT Participants in accordance with the SWNMT Project Participation Agreement.

1.60 “SWNMT Participants” means EPE, PNM, and TNMP in their capacity as participants in SWNMT.

1.61 “SWNMT Project Participation Agreement” means the Southwest New Mexico Transmission Project Participation Agreement, dated April 11, 1977, by and between EPE, PNM and Community Public Service Company (predecessor to TNMP).

1.62 “Termination Costs” means the costs incurred by or on behalf of any of the Luna Substation Owners or any of the Utilities, upon termination of this Agreement in accordance with Article 23.4 in taking one or more of the following actions: (a) returning, or canceling pending orders made by the Project Manager or PNM or TNMP (in the case of the Luna Interconnection Facilities) or any of the Utilities (in the case of an Interconnection System Upgrade) for equipment or facilities required for the interconnection contemplated by this Agreement; (b) removing any portion of the Luna Interconnection Facilities or Interconnection System Upgrades; and (c) performing such work as may be necessary to ensure the safety of persons and property and to preserve the integrity of the Southwest New Mexico Transmission Project and any of the Utilities’ Transmission Systems.

1.63 “TNMP” shall have the meaning set forth in the first paragraph of this Agreement.

1.64 “TNMP OATT” means TNMP’s Open Access Transmission Tariff filed with FERC in accordance with FERC’s Order No. 888, and any successor transmission service tariff thereto, including any such successor tariff of a Regional Transmission Organization to which TNMP transfers operating authority over the TNMP Transmission System.

1.65 “TNMP Transmission System” means all of the facilities owned by TNMP that are made available for the purpose of providing transmission service under the TNMP OATT.

1.66 “Utilities” means EPE, PNM, and TNMP in their capacity as owners and operators of their individual electric transmission systems. “Utility” means one of the Utilities.

1.67 “Utilities’ OATTs” means the EPE OATT, the PNM OATT, and the TNMP OATT.

1.68 “Utilities’ Transmission Systems” means the EPE Transmission System, the PNM Transmission System, and the TNMP Transmission System.

1.69 “WSCC” means the Western Systems Coordinating Council, or any successor organization.

1.70 “WSCC Agreement” means the Western Systems Coordinating Council Agreement dated March 20, 1967.

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1.71 “WSCC Reliability Criteria Agreement” means the Western Systems Coordinating Council Reliability Criteria Agreement dated June 18, 1999, among the WSCC and certain members of WSCC.

ARTICLE II

T ERM

2.1 Effectiveness of this Agreement. This Agreement shall become effective upon execution by the Parties subject to obtaining the required regulatory authorizations, including, without limitation, acceptance by FERC under Section 205 of the Federal Power Act. Notwithstanding the foregoing, no Party shall take any action which is inconsistent with the terms of this Agreement and Applicable Laws and Regulations during the period between execution of this Agreement and acceptance by FERC or earlier termination of this Agreement.

2.2 FERC Filing.

2.2.1 Within a reasonable time after execution of this Agreement by the Parties, the Luna Substation Owners shall file this Agreement with FERC as a “Rate Schedule” within the meaning of Part 35 of FERC’s regulations and with any other Governmental Authority to the extent required by Applicable Laws and Regulations. Each of the Parties shall support this Agreement in its current form at FERC when filed. Generator shall reasonably cooperate with the Luna Substation Owners with respect to obtaining FERC approval of such FERC filing and provide any information, including testimony, reasonably required by the Luna Substation Owners to comply with the applicable FERC filing requirements.

2.2.2 Promptly upon execution by the Parties of any amendment to this Agreement, the Luna Substation Owners shall, if necessary, file such amendment with FERC and with any other Governmental Authority, to the extent required by Applicable Laws and Regulations. Each of the Parties shall support any such amendment at FERC when filed. Generator shall reasonably cooperate with the Luna Substation Owners with respect to obtaining FERC approval of such FERC filing and provide any information, including testimony, reasonably required by the Luna Substation Owners to comply with the applicable FERC filing requirements.

2.2.3 If FERC requires conditions to or modifications of any of the terms, conditions or provisions agreed to herein or in an amendment hereto and: (i) no Party notifies the other Parties in writing within fourteen (14) calendar days following receipt of FERC’s order that the notifying Party takes exception to FERC’s order, the FERC-ordered modifications and/or conditions shall become part of this Agreement as an amendment or appendix thereto; or (ii) any Party taking exception to FERC’s conditions or modifications gives the fourteen day notice to all other Parties of such exception, then the Parties shall promptly negotiate an amendment to this Agreement acceptable to FERC and providing similar benefit, rights, or effect to the Parties. Any such amendment shall be effective when accepted for filing by FERC.

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Each Party reserves all of its rights under Applicable Laws and Regulations for purposes of this Article 2.2.3.

2.3 Term. This Agreement shall continue in full force and effect until a mutually agreed termination date; provided, however, that such termination date shall be no later than the date on which the Facility permanently ceases commercial operation; and provided further that this Agreement may be terminated earlier (a) as provided for in Article 5.4.6; (b) upon a Party’s default in accordance with the provisions of Article 23.2; (c) if the required regulatory authorizations described under Article 2.2 have not been obtained by the Operation Date; or (d) by the mutual agreement of the Parties or as explicitly provided elsewhere in this Agreement. Unless no longer required by FERC, any termination of this Agreement permitted hereunder shall not take effect until the filing at FERC of a notice of termination of this Agreement which notice is accepted for filing by FERC.

2.4 Material Adverse Change . In the event of a change in law or regulation after the Effective Date that has a material adverse effect, or may reasonably be expected to have a material adverse effect, on a Party’s ability to perform under this Agreement, the Parties shall negotiate in good faith any amendment or amendments to this Agreement necessary to adapt the terms of this Agreement to such change in law or regulation. If the Parties are unable to reach agreement on any such amendments within sixty (60) days of the commencement of their negotiations, the Parties reserve their rights under Applicable Laws and Regulations, including as provided in Article 30.7.

2.5 Survival. The applicable provisions of this Agreement shall continue in effect after cancellation, expiration, or termination of this Agreement to provide for final billings, billing adjustments, and the determination and enforcement of liability and indemnification obligations arising from acts or events that occurred while this Agreement was in effect. In addition, upon termination of this Agreement, Generator shall be responsible for any Termination Costs incurred by or on behalf of the Luna Substation Owners and any of the Utilities.

ARTICLE III

C ONTINUING O BLIGATIONS AND R ESPONSIBILITIES

3.1 Interconnection Service Provided. The Luna Substation Owners shall provide Generator with Interconnection Service for the Facility over the Luna Interconnection Facilities at the Interconnection Point. The Luna Substation Owners and each of the Utilities shall not provide Interconnection Service under this Agreement for any other generating units, wherever located. Any other generating units shall be covered by a separate interconnection agreement or an amendment of this Agreement as provided for in Article 3.2.3.

3.2 Scope of Interconnection Service.

3.2.1 Interconnection Service shall consist of the services necessary to allow the physical interconnection of the Facility with the Luna Substation, pursuant to the terms of this Agreement. Interconnection Service shall not include the purchase or sale of energy or ancillary services to or from the Facility beyond the Interconnection Point,

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or the delivery of energy or ancillary services from the Facility beyond the Interconnection Point, which services shall be provided separately under Utilities’ OATTs or under separate agreements, as applicable.

3.2.2 Generator shall be responsible for (a) making arrangements under the Utilities’ OATTs for transmission and ancillary services on the Utilities’ Transmission Systems, and under other applicable tariffs for such services on other transmission system(s), associated with the injection or delivery of the capacity and/or energy produced by the Facility beyond the Interconnection Point, which services shall not be provided under the terms of this Agreement, (b) obtaining capacity and/or energy to satisfy its Facility service or other requirements, and (c) making arrangements under applicable tariffs for transmission services, losses, and ancillary services associated with the use of the Utilities’ Transmission Systems for the injection or delivery of capacity and energy to other generating facilities owned by Generator for the purpose of supplying facility service or for any other use. Each of the Utilities makes no representations to Generator regarding the availability of transmission service on such Utility’s Transmission System, and Generator agrees that the availability of such transmission service may not be inferred or implied from this Agreement. Generator must request such transmission service in accordance with the Utilities’ OATTs.

3.2.3 In the event of an increase in the output of the Facility or other material change or modification to the configuration and/or operation of the Facility, the Parties shall negotiate appropriate revisions to this Agreement, including, as necessary, the performance by the Luna Substation Owners, and, as necessary, one or more of the Utilities, of studies to determine the effects of such increase or change, and changes to the specifications or requirements set forth in the Appendices to this Agreement, as necessary to permit the Luna Substation Owners to provide Interconnection Service to the Facility under this Agreement in a safe, secure and reliable manner.

3.3 Services Outside Scope of Agreement

3.3.1 This Agreement provides only for interconnection of the Facility with the SWNMT at the Luna Substation. Nothing in this Agreement shall be read as a request by Generator, or a commitment by any of the Utilities, to install any facilities other than those necessary to interconnect the Facility with the SWNMT at the Luna Substation.

3.3.2 This Agreement does not obligate any Party to provide, or entitle any Party to receive, any transmission or other service not expressly provided for herein. This Agreement does not provide a right to inject or transmit energy, which right shall be realized through the necessary arrangements for transmission rights and service, including upgrades required for transmission service. Each Party is responsible for making any arrangements necessary for it to receive any transmission or other service not expressly provided for herein that it may desire from any of the other Parties or any other Person. Notwithstanding any other provision of this Agreement,

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nothing herein shall be construed as a relinquishment or foreclosure of any rights to transmission credits to which Generator may be entitled, now or in the future, as a result of, or otherwise, associated with, the transmission capacity, if any, created by the Interconnection System Upgrades, if any.

3.3.3 This Agreement does not provide for the injection, sale or purchase of power or energy from or to the Facility. Upon Generator’s request, construction, back-up, start-up, auxiliary, station, and maintenance power required for the Facility at the Facility site shall be provided under a separate agreement or any applicable tariff.

3.4 No Guarantees; Release. The Luna Substation Owners (which, for the purposes of this Article 3.4, shall be deemed to include the Project Manager and the Operating Agent), the SWNMT Participants, and each of the Utilities do not warrant against the occurrence of, and Generator releases the Luna Substation Owners, the SWNMT Participants, and each of the Utilities from any and all claims or damages associated with: (a) damage to the Facility resulting from electrical transients, or (b) any interruption in the availability of the Luna Interconnection Facilities, the Luna Substation, any Interconnection System Upgrades or the SWNMT, except, in the case of subpart (a) or (b), to the extent determined to be attributable to the negligence of, willful misconduct of, or default under Article XXII by the Luna Substation Owners, the SWNMT Participants or a Utility. Generator does not warrant against the occurrence of, and the Luna Substation Owners, the SWNMT Participants and each of the Utilities release Generator from any and all claims or damages associated with: (y) damage to the Luna Interconnection Facilities, the Luna Substation, any Interconnection System Upgrades, the SWNMT or Utilities’ Transmission Systems resulting from electrical transients, or (z) any interruption in the availability of Generator’s Facility, except, in the case of subpart (y) or (z), to the extent determined to be attributable to Generator’s negligence, willful misconduct or default under Article XXII.

3.5 Reporting Requirements. Each Party shall notify the other Parties promptly when it becomes aware of its inability to comply with the terms and conditions of this Agreement, and provide a sufficient explanation of its inability to comply, including the date, duration, and reasons for its inability to comply, and corrective actions taken; provided that such notification shall not release such Party from its obligation to comply with this Agreement, except as provided under Article XIX.

3.6 Third Party Activity. During the term of this Agreement, other Persons may develop, construct or acquire, and operate generating facilities in the Utilities’ service territories, and reservations of transmission service by such Persons under the Utilities’ OATTs may adversely affect the availability of transmission service for the Facility’s electric output. The Utilities have no obligation to disclose to Generator any information regarding such third party activity, except as may be required under the Utilities’ OATTs or under this Agreement subject to the provisions of Article 3.7. To the extent that such third party activity has or the Utility reasonably expects the third party activity to have a material adverse impact on the operation of the Facility or the Interconnected Facilities, the relevant Utility shall, subject to Article 3.7, disclose to Generator such material information as is

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necessary for Generator to understand the nature and extent of such adverse impact and the viable remedies.

3.7 Compliance with Utilities’ OATTs and FERC Orders No. 888 and No. 889. Nothing in this Agreement shall be deemed or construed to obligate any of the Utilities to provide or make available to Generator any information in violation of such Utility’s OATT, FERC Orders No. 888 and No. 889 or any other Applicable Laws and Regulations.

ARTICLE IV

O PERATING C OMMITTEE

4.1 Operating Committee. Within fifteen (15) days after the Effective Date, each Party shall designate a primary and alternate representative to serve on an operating committee (“Operating Committee”), which shall meet periodically to ensure effective cooperation in system planning, to deal promptly with the various operating and technical issues that may arise during the term of this Agreement, and to attempt to resolve any disputes that may arise under this Agreement, as more specifically described in Article 4.2. Each primary and alternate representative shall be authorized, on behalf of the designating Party, to act with respect to all matters delegated to the Operating Committee. Each Party shall promptly notify the other Parties of the designation of its primary and alternate representatives and of any subsequent changes in such designations in accordance with Article 30.9.

4.2 Responsibilities of the Operating Committee. The Operating Committee shall have the following responsibilities and functions, each of which shall be performed consistent with the terms and conditions of this Agreement and Good Utility Practice: (a) to establish general policies to be followed in the coordination of the operation and maintenance of the Interconnected Facilities; (b) to establish procedures and standard practices, consistent with the terms and conditions of this Agreement, for guidance for each Party’s system controllers and other operating personnel regarding the interconnected operations of the Luna Substation and the Interconnected Facilities; (c) to establish detailed procedures to govern in the event of an Emergency; (d) to establish detailed procedures and standard practices for metering, communications, and control facilities; (e) to establish the plan for disconnection of the Facility at the termination of this Agreement; (f) to establish other procedures and standard practices as may be needed from time to time and to engage in other activities consistent with the terms and conditions of this Agreement, provided that the Operating Committee shall not have the authority to modify or amend any term or condition of this Agreement; and (g) to attempt to resolve any disputes that may arise under this Agreement in accordance with Article 29.1.

4.3 Effectiveness of Operating Committee Determinations. All determinations made by the Operating Committee, including the establishment of any procedure or standard practice, within the scope of the Operating Committee’s responsibilities set forth in Article 4.2, shall be effective when signed by one designated representative of each Party and, if necessary, accepted for filing or approved by FERC.

ARTICLE V

F ACILITY I NTERCONNECTION

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5.1 Establishment of Interconnection. The Facility to be constructed by Generator shall be interconnected to the SWNMT at the Luna Substation, such interconnection being further described in Appendices A, B and D. Appendix D may be revised by mutual written agreement of the Parties. Pursuant to this Agreement, the Parties shall, during the term of this Agreement, continue in service the existing transmission lines and essential terminal equipment, to the extent required to establish and maintain a reliable interconnection.

5.2 Necessary Easements, Permits, Licenses, Etc. Subject to Articles 5.6.1 and 5.6.2, each Party shall diligently pursue all rights, easements, permits, licenses, certificates and properties necessary to construct and maintain its portion of the Interconnected Facilities and, in the case of each of the Utilities, the Interconnection System Upgrades. If a Party cannot reasonably acquire all the rights, easements, permits, licenses, certificates and properties necessary to construct and maintain its portion of the Interconnected Facilities and/or Interconnection System Upgrades, the Party shall promptly provide written notice to the other Parties indicating its inability. After such notice, Generator shall have thirty (30) days to authorize the appropriate Utility or Utilities to initiate and diligently pursue the following at Generator’s expense: (a) condemnation proceedings, (b) alternate routes, designs, methods or procedures necessary for the construction or maintenance of the Interconnected Facilities and/or Interconnection System Upgrades, or (c) any other appropriate action mutually agreed upon by the Generator and the appropriate Utility or Utilities. Each Party shall also pursue with Due Diligence and maintain all necessary governmental approvals, permits, licenses and inspections necessary for its performance of this Agreement.

5.3 Design and Construction of Generator’s Interconnection Facilities.

5.3.1 Unless the Parties agree otherwise in writing, Generator shall, at its own expense, design, procure, construct, install, operate, maintain and repair/replace Generator’s Interconnection Facilities.

5.3.2 Protective Equipment to be installed by Generator is set forth in Appendix A. This Protective Equipment shall be subject to review and approval by the Luna Substation Owners, which approval shall not be unreasonably withheld or denied. The Luna Substation Owners’ review and/or approval shall not be deemed an endorsement of any equipment nor as any warranty as to the fitness, safety, durability or reliability of any equipment.

5.3.3 Generator shall design, procure, construct and install Generator’s Interconnection Facilities in accordance with applicable Interconnection Studies and Good Utility Practice.

5.3.4 At Generator’s expense, Generator’s Interconnection Facilities shall be constructed by Generator or, at Generator’s option, a third party contractor to be selected by Generator. Notwithstanding the foregoing, Generator understands and agrees that EPE, as Project Manager, and to the extent necessary PNM and TNMP, shall complete the connection of the Luna Interconnection Facilities and Generator’s

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Interconnection Facilities, and each Utility shall manage all construction work involving Interconnection System Upgrades on such Utility’s Transmission System.

5.3.5 Generator shall, at its own expense, operate, maintain and repair/replace Generator’s Interconnection Facilities in accordance with Articles VIII and XIII.

5.4 Design and Construction of Luna Interconnection Facilities and Interconnection System Upgrades.

5.4.1 At Generator’s expense, EPE, as Project Manager, and to the extent necessary PNM and TNMP, shall design, procure, construct, install, operate, maintain, and repair/replace the Luna Interconnection Facilities. The Luna Interconnection Facilities shall be owned by each of the Luna Substation Owners in the percentage of ownership interest each holds in the SWNMT at Luna Substation. These percentages are: TNMP: 5.0%, PNM: 37.8%, and EPE: 57.2%.

5.4.2 At Generator’s expense, each of the Utilities shall design, procure, construct, install and own Interconnection System Upgrades on such Utility’s Transmission System. After the Operation Date, each of the Utilities shall, at its own expense, operate, maintain and repair/replace Interconnection System Upgrades on such Utility’s Transmission System in accordance with Articles VIII and XIII.

5.4.3 Equipment, including Protective Equipment, to be installed by the Project Manager and operated by the Operating Agent at Generator’s expense, and owned by each of the Luna Substation Owners in the percentage of ownership interest each holds in the SWNMT at Luna Substation, is set forth in Appendix B. A good faith estimate of the cost of the Luna Interconnection Facilities, Interconnection System Upgrades, and the Protective Equipment, and a schedule of Generator’s payments therefor, is also set forth in Appendix B.

5.4.4 The contemplated schedule for EPE, as Project Manager, and to the extent necessary PNM and TNMP, and the Utilities’ to perform their design, procurement, construction and installation obligations hereunder is set forth in Appendix C.

5.4.5 EPE, as Project Manager, and to the extent necessary PNM and TNMP, shall design, procure, construct and install the Luna Interconnection Facilities, and each of the Utilities shall design, procure and construct the Interconnection System Upgrades on its transmission system, in accordance with applicable Interconnection Studies and Good Utility Practice. The Luna Interconnection Facilities and Interconnection System Upgrades must be sufficient, as designed and built, to deliver the full capacity output of the Facility (not to exceed 614 MW) to the Interconnection Point and to enable the Facility to receive capacity necessary to satisfy its initial operational requirements (not to exceed 20 MW of capacity).

5.4.6 As soon as practicable after receiving from Generator written notice to proceed, EPE, as Project Manager, and to the extent necessary PNM and TNMP, shall commence construction of the Luna Interconnection Facilities, and each of the

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Utilities shall commence construction of the Interconnection System Upgrades on its transmission system. Generator reserves the right, (a) upon three (3) Business Days’ written notice to the Project Manager, and to the extent applicable PNM and TNMP, to suspend at any time all work by the Project Manager, and to the extent applicable PNM and TNMP, associated with the construction and installation of the Luna Interconnection Facilities or the Protective Equipment, as applicable, or any portion of them and (b) upon three (3) Business Days’ written notice to any of the Utilities to suspend at any time all work by such Utility associated with the construction and installation of Interconnection System Upgrades on its transmission system. In such event, Generator shall be responsible for the costs which the Project Manager, and to the extent applicable PNM and TNMP, or any Utility incurs (a) prior to the suspension of work consistent with the scope of work set forth in Appendix B, and deviation in such scope of work (subject to Generator’s authorization of those deviations described in Article 7.1.2), and for actions and costs authorized by Generator pursuant to Article 5.8.2, and (b) in suspending such work, including any costs incurred in order to wind up such work and to ensure the safety of persons and property and the integrity of the Utility’s facilities and the SWNMT and, if applicable, any costs incurred or penalties sustained in connection with the cancellation of material and labor contracts which the Project Manager, and to the extent applicable PNM and TNMP, or any Utility cannot reasonably avoid; provided, however, that, prior to canceling any material or labor contract, the Project Manager, and to the extent applicable PNM and TNMP, and each Utility shall obtain Generator’s authorization which shall not be unreasonably withheld or denied. The Project Manager, and to the extent applicable PNM and TNMP, and each Utility shall invoice Generator pursuant to Article VII. In the event that Generator suspends performance of work by the Project Manager, and to the extent applicable PNM and TNMP, and each of the Utilities pursuant to this Article 5.4.6 and has not requested that they re-commence such work within three hundred sixty-five (365) days of the date on which Generator requested such suspension, this Agreement shall terminate. Generator shall be responsible for costs as outlined in Article 5.4.6, and any non-returnable equipment not already installed shall become the property of Generator “as is, where is” upon Generator’s payment of the costs associated with such equipment.

5.4.7 The Project Manager shall inform Generator on a monthly basis, and at such other times as Generator reasonably requests, of the status of the construction and installation of the Luna Interconnection Facilities, and the Protective Equipment. Each Utility shall inform Generator on a monthly basis, and at such other times as Generator reasonably requests, of the status of the construction and installation of any Interconnection System Upgrades on such Utility’s transmission system. The information provided shall include the following: progress to date; a description of scheduled activities for the next month; the delivery status of all equipment ordered; and the identification of any event which any such Party reasonably expects may delay construction of, or increase the cost of, the Luna Interconnection Facilities, Interconnection System Upgrades and/or the Protective Equipment, as applicable.

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5.4.8 Notwithstanding any other provision in this Agreement, Generator shall not be responsible for any costs or expenses associated with the design, procurement, construction, installation, testing, operation, maintenance, repair/replacement, or any modifications or upgrades to any of the Utilities’ Transmission Systems or the SWNMT that are undertaken in order to prevent, mitigate, or otherwise remedy conditions that existed prior to the establishment of the interconnection of the Facility with the SWNMT at the Luna Substation, and that were required or should have been required in order to prevent, mitigate, or remedy such conditions regardless of, or that otherwise are unrelated to, such interconnection. To the extent that Generator has made payment to any of the Utilities for any such costs and expenses, such Utility shall refund to Generator such sums, with interest at the Interest Rate calculated from the date Generator made such payment(s) to the date Generator receives the refund, within thirty (30) days of any determination as to the appropriate allocation of the costs for such modifications or upgrades.

5.4.9 Once transmission service commences, pursuant to a transmission service agreement, under a Utility’s OATT for the delivery of power produced by the Facility, such Utility shall credit Generator in an amount equal to the cost, paid by Generator, of Interconnection System Upgrades on such Utility’s transmission system plus interest calculated at the Interest Rate, to the extent such credit and interest are required by FERC rules at the time such transmission service commences. Generator may assign any portion of such credit to any Person who takes power from the facility or as otherwise permitted under FERC rules.

5.5 Subcontractors . Nothing in this Agreement shall prevent any Party from using the services of subcontractors as it deems appropriate; provided, however, each Party shall require such subcontractors to comply with the relevant terms and conditions of this Agreement. The creation of any subcontractor relationship shall not relieve the retaining Party of any of its obligations under this Agreement.

5.6 Rights of Access.

5.6.1 Generator shall furnish, at no cost to the Project Manager and the Operating Agent, as applicable, all access, easements, or licenses upon, over, under, and across the Facility site that are necessary for the Project Manager and the Operating Agent, as applicable, and their Agents and subcontractors to design, procure, construct, install, test, operate, maintain and repair/replace the Luna Interconnection Facilities in accordance with the terms of this Agreement; provided, however, that, in exercising such access rights, the Project Manager and the Operating Agent, as applicable, shall (a) not unreasonably disrupt or interfere with normal operations of Generator’s business, (b) act in a manner consistent with Good Utility Practice, and (c) adhere to the safety rules and procedures established by Generator. Generator shall execute such documents as the Project Manager and the Operating Agent, as applicable, may reasonably require to enable the Project Manager or Operating Agent, as applicable, to establish record evidence of such access rights. Such access rights shall remain in effect for so long as this Agreement is in effect.

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5.6.2 The Luna Substation Owners and/or the applicable Utility or Utilities shall furnish, at no cost to Generator, all access, easements or licenses to the Luna Substation property that are necessary for Generator and its Agents and subcontractors to design, procure, construct, install, test, operate, maintain and repair/replace Generator’s Interconnection Facilities in accordance with the terms of this Agreement. Such access rights for Generator’s facilities located inside the Luna Substation shall be exercised by Generator only with supervision by Project Manager or Operating Agent, as applicable. Generator shall provide the Project Manager or Operating Agent, as applicable, reasonable notice under the circumstances of any request for such supervised access to the Luna Substation, and the Project Manager or Operating Agent, as applicable, and Generator shall mutually agree upon the date and time of such supervised access, such agreement not to be unreasonably withheld or delayed. In addition to the aforementioned requirement, in exercising such access rights, Generator shall (a) not unreasonably disrupt or interfere with normal operations of the Project Manager, the Operating Agent or the Luna Substation Owners’ business, (b) act in a manner consistent with Good Utility Practice, and (c) adhere to the safety rules and procedures established by the Project Manager, Operating Agent and the Luna Substation Owners. The Project Manager or Operating Agent, as applicable, shall execute such documents as Generator may reasonably require to enable it to establish record evidence of such access rights. Such access rights shall remain in effect for so long as this Agreement is in effect.

5.6.3 Any Party or its subcontractors performing construction, or other work, on the property of any of the other Parties shall be responsible for proper housekeeping during the period the work is being performed and proper clean-up of the property in a timely fashion after the work is completed.

5.7 Completion of Construction . Generator shall promptly notify the Project Manager in writing when the construction of Generator’s Interconnection Facilities is complete. Likewise, the Project Manager shall promptly notify Generator in writing when the construction of the Luna Interconnection Facilities is complete, and each Utility shall promptly notify Generator in writing when construction of Interconnection System Upgrades on such Utility’s transmission system is complete.

5.8 Timely Completion.

5.8.1 Generator shall use Commercially Reasonable Efforts to design, procure, construct, install, and test Generator’s Interconnection Facilities in accordance with the schedule set forth in Appendix C, which schedule may be revised from time to time by mutual agreement of the Parties.

5.8.2 The Project Manager, and to the extent necessary PNM and TNMP, shall use Commercially Reasonable Efforts to design, procure, construct, install, and test the Luna Interconnection Facilities, and each of the Utilities shall use Commercially Reasonable Efforts to design, procure, construct, install, and test Interconnection System Upgrades on such Utility’s Transmission System, in each case in accordance

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with the schedule set forth in Appendix C, which schedule may be revised from time to time by mutual agreement of the Parties. The Project Manager, and to the extent applicable PNM and TNMP, and any Utility shall, at Generator’s request and expense, take all appropriate actions to accelerate its work under this Agreement in order to meet the schedule set forth in Appendix C, provided that Generator authorizes such actions and the costs associated therewith in advance and pays such costs in accordance with a payment schedule mutually agreed upon by the applicable Parties.

5.8.3 If any of the Interconnection System Upgrades is not reasonably expected to be completed prior to the Commercial Operation Date of the Facility, Generator may, at its option, have operating studies performed at its expense to determine the maximum allowable output of the Facility. Based upon the portion of the Interconnection System Upgrades that is expected to be completed prior to such Commercial Operation Date and, subject to Good Utility Practice, Generator will be permitted to operate the Facility, provided such limited operation of the Facility does not adversely affect the safety and reliability of the Luna Substation, the SWNMT, or any of the Utilities’ Transmission Systems.

5.9 Environmental Compliance and Procedures. The Parties shall comply with (a) all applicable Environmental Laws in meeting all their obligations under this Agreement; and (b) all local notification and response procedures required for all applicable environmental and safety matters which affect the ability of the Parties to meet their respective obligations under this Agreement.

5.10 Generator Modeling Data. Generator shall provide the Operating Agent and the Luna Substation Owners with such final modeling data of the Facility and Generator’s Interconnection Facilities that reflect final Facility unit data and settings of the generation protection and control equipment as is reasonably requested by the Operating Agent and the Luna Substation Owners and is necessary for reliable operation of the Luna Substation, the SWNMT and Utilities’ Transmission Systems, including (a) the turbine speed/load controls including the governor; and (b) the excitation system including the automatic voltage regulator, power system stabilizer, over-excitation controls and limits, and other controls and limits.

5.11 Equipment Requirements. All equipment shall be of utility grade that meets or exceeds the quality of the equipment as required by the Project Manager. The trip energy source for the interconnection breaker shall be of a stored energy type (i.e., battery) that will be available under circumstances when the alternating current source is unavailable. Generator shall ensure that Generator’s Interconnection Facilities comply with all applicable requirements of the National Electrical Safety Code, as amended from time to time, and/or any Applicable Laws and Regulations.

5.12 Required Diagrams. Generator shall maintain the following equipment at locations approved by the Operating Agent, which approval shall not be unreasonably withheld or denied: (a) a permanent and weatherproof one-line electrical diagram of the Facility located

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at the Facility site; and (b) a permanent and weatherproof map of the Facility showing the location of all major equipment.

5.13 Required Personnel Information. No later than fifteen (15) Business Days after the Effective Date, Generator shall provide the Operating Agent the names and current telephone numbers of at least two (2) persons who are authorized to provide access to the Facility and who have authority to make decisions regarding the Facility, Generator’s Interconnection Facilities, and Generator’s operations. Generator shall keep the names and telephone listings current at all times during the term of this Agreement.

5.14 Use of Interconnected Facilities by Third Parties.

5.14.1 Except as may be required by Applicable Laws and Regulations, or as otherwise agreed to among the Parties, the Interconnected Facilities shall be dedicated to the sole purpose of interconnecting the Facility to the SWNMT at the Luna Substation and shall be used for no other purpose.

5.14.2 If required by Applicable Laws and Regulations, or if the Parties mutually agree to allow one or more third parties to use the Interconnected Facilities, or any part thereof, and such use decreases the capacity of the Interconnected Facilities available to the Facility, or otherwise causes any detriment to the Facility or to Generator, or benefits any party (including any of the Utilities) other than Generator, then Generator and such third party (parties) shall negotiate in good faith to determine the appropriate compensation due to Generator as a result of such third party use and to determine the appropriate allocation of operating and maintenance costs and the annual carrying charges. Each of the Luna Substation Owners shall include a provision comparable to this Article 5.14.2 in its agreements with third party users providing for such third party users to participate in such negotiations. In any case, the Generator shall only be entitled to receive a reduction in charges under this Agreement equal to the amount of charges allocated to the third party user(s). If the issue of such compensation or allocation cannot be resolved through such negotiations, it shall be submitted to the FERC for resolution.

5.14.3 If one or more third parties are to use the Interconnection Facilities in accordance with this Article 5.14 and the Operating Agent determines that, as a result, Good Utility Practice requires that modifications be made to the Interconnected Facilities, the Operating Agent must comply with notification and scheduling provisions of Article 5.15. In no event shall Generator be responsible for the costs of any such modifications.

5.14.4 If it is determined by the FERC or any Governmental Authority that any costs associated with the design, engineering, construction, procurement, or installation of any of the Luna Interconnection Facilities or Interconnection System Upgrades paid for by Generator pursuant to this Agreement are not Generator’s responsibility, the Luna Substation Owners (in the case of Luna Interconnection Facilities) and each Utility (in the case of Interconnection System Upgrades on such Utility’s Transmission System) shall refund to Generator, no later than sixty (60) days after

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the determination by FERC or any Governmental Authority, that portion of the costs paid by Generator that are included in the transmission revenue requirement or were paid by Generator and that have not been reflected in credits, if any, against the cost of transmission service from the Facility, with interest at the Interest Rate.

5.15 Facility Modifications.

5.15.1 Luna Interconnection Facilities and Utilities’ Transmission Systems.

(a) Any additions, modifications, or replacements of the Luna Interconnection Facilities must be constructed and operated in accordance with Good Utility Practice. If such additions, modifications, or replacements made after the Operation Date will likely cause a material adverse effect on Generator’s operation of the Facility, the Operating Agent will, except in cases of Emergency, provide a minimum of thirty (30) days’ advance written notice to Generator prior to undertaking such additions, modifications, or replacements. In the written notice, the Operating Agent must advise Generator when such additions, modifications or replacements are expected to be made; the time period expected to be required to complete such additions, modifications or replacements; and whether, if known, such additions, modifications or replacements are expected to interrupt or curtail the flow of electricity from the Facility. The Parties shall mutually agree in advance upon a schedule for such additions, modifications or replacements, such agreement not to be unreasonably withheld or delayed.

(b) Unless required by Applicable Laws and Regulations, Generator shall not be responsible for the costs of any additions, modifications, or replacements made to the Luna Interconnection Facilities, the Luna Substation, the SWNMT, or any of the Utilities’ Transmission Systems made by the Luna Substation Owners, the SWNMT Participants or such a Utility in its sole discretion, or to the Interconnected Facilities, after the Operation Date in order to facilitate (a) the interconnection of a third party or (b) the provision of transmission service to or for a third party. Generator shall, however, be responsible for all costs of any additions, modifications, or replacements made to the Luna Interconnection Facilities, the SWNMT, or any of the Utilities’ Transmission Systems as a result of any additions, modifications, or replacements made by Generator to the Facility.

(c) If any additions, modifications, or replacements to the Luna Interconnection Facilities or the Luna Substation (other than those caused by additions, modifications, or replacements made by the Generator to the Facility) cause a material adverse effect on the

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Generator’s Interconnection Facilities or the connection of the Facility to the Luna Substation, the Luna Substation Owners shall be responsible, at their sole cost and expense, for all actions necessary to mitigate such effect on the connection (“Mitigation Actions”) and, if necessary, to promptly and expeditiously re-establish the connection of the Facility with the Luna Substation in accordance with Good Utility Practice and/or secure such services as are necessary to deliver the capacity and energy to the Interconnection Point in accordance with Good Utility Practice (“Reconnection Activities”); provided, however, that, if the Luna Substation Owners are required by Applicable Laws and Regulations or the RTO (if applicable) to undertake such additions, modifications, or replacements, and the Mitigation Action or Reconnection Activity is in conflict with said Applicable Laws and Regulations or the requirements of the RTO (if applicable), the Luna Substation Owners shall not be required to undertake any Mitigation Action or Reconnection Activity.

5.15.2 Generator’s Facility and Interconnection Facilities . Except for changes deemed by the Operating Agent to be necessary to ensure the protection and safety of Parties’ personnel and the safety and reliability of Parties’ property, Generator shall not be required to make any modifications to the Facility or Generator’s Interconnection Facilities unless such change is consistent with Good Utility Practice and required (i) as a result of a change in the Facility or (ii) as a result of a change on any of the Utilities’ electric systems which is required by Good Utility Practice. Generator shall not be responsible for the cost of any such modifications and the cost of operating and maintaining such modifications unless required by Applicable Laws and Regulations or such modifications are required as a result of a change in the Facility made by Generator.

5.16 Generator’s Connection at Luna Substation. EPE has reserved a position on the existing 345 kV ring bus at the Luna Substation for the connection of a second 345 kV SWNMT transmission line (“Second Line”). With Generator’s interconnection, the existing Luna Substation will be expanded from its current ring-bus configuration into a breaker-and-a-half configuration. Two positions in the substation bus will remain open for future connection of the Second Line. EPE will design and construct the Luna Substation expansion in two phases, both funded by the Generator, subject to Article 5.4.9. These two phases are:

Phase I: The Luna Substation is expanded as shown in Appendix D.

Phase II: The Luna Substation is expanded into a breaker-and-a-half configuration, as shown in Appendix D, and the Facility will be connected as shown in Appendix D. This will be the final connection position for the Facility. The schedule for Phase II is also shown in Appendix C.

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In the future, EPE shall decide when (pursuant to the terms and conditions of this Agreement) and where to connect the Second Line to the Luna Substation. EPE shall bear the cost of such connection. With respect to the location of the Second Line connection, EPE shall elect one of the two following connection options: (i) EPE may elect to connect at the position occupied by the Facility during Phase I, in which case EPE shall reimburse Generator for the cost of the circuit breaker originally installed in this position or (ii) EPE may elect to connect at the open position in the expanded Luna Substation created during Phase II and shown in Appendix D, in which case EPE shall reimburse Generator for the cost of one-half of the circuit breaker shared by the terminals of the Second Line and Generator’s final bus position.

In the event that either of the two open bus positions should be used by EPE, TNMP, PNM, or a third party for purposes other than to connect the Second Line, Generator shall not be responsible for any costs associated with such other purpose and shall be reimbursed by the appropriate party in a manner consistent with and similar to the reimbursement provisions and conditions identified for EPE above. EPE, TNMP, PNM, or the Luna Substation Owners, as appropriate, shall include a provision in any agreement with such third party providing for reimbursement to Generator in a manner consistent with and similar to the reimbursement provisions and conditions identified for EPE above.

ARTICLE VI

A CCEPTANCE AND P ERFORMANCE T ESTING

AND C OMPLIANCE M ONITORING

6.1 Responsibility for Testing.

6.1.1 Prior to the Operation Date, Generator shall perform all testing of the Facility and Generator’s Interconnection Facilities required by the RTO (if applicable), NERC and WSCC. The Project Manager or the Operating Agent, as applicable, may require Generator to perform additional testing whenever Project Manager or Operating Agent reasonably determines that such additional testing is required for reliability reasons. All testing shall be successfully completed before the Operation Date. Testing subsequent to the Operation Date shall be performed in compliance with the frequency requirements of NERC, WSCC, and the RTO (if applicable) and any other reliability requirements of any other organization/entity with responsibility for electricity and whose requirements Generator is obligated to follow. All such tests shall be performed to the specifications of NERC, WSCC, the RTO (if applicable), or any other specifications required by new or other reliability organizations with responsibility for electricity and whose requirements Generator is obligated to follow. Generator shall inform the Project Manager or the Operating Agent, as applicable, in advance (whenever possible, a minimum of five (5) Business Days) when such tests are scheduled to occur, and the Luna Substation Owners shall have the right to have representatives observe and monitor such tests. The cost of all such testing shall be borne by Generator.

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6.1.2 Prior to the Operation Date, the Project Manager or the Operating Agent, as applicable, shall perform all testing of the Luna Interconnection Facilities, and each of the Utilities shall perform all testing of Interconnection System Upgrades on its transmission system, required by NERC, WSCC and the RTO (if applicable). All testing shall be successfully completed before the Operation Date. After the Operation Date, the Operating Agent and each of the Utilities shall test their facilities at their own expense (or, in the case of the Operating Agent, the Luna Interconnection Facilities at the expense of the Luna Substation Owners) in accordance with Good Utility Practice. Generator shall have the right, upon five (5) Business Days’ advance written notice to the Operating Agent or any of the Utilities, to require additional testing of such entity’s facilities, at Generator’s expense, if Generator reasonably believes that such entity’s facilities are causing a material adverse effect on the operation of the Facility or Generator’s Interconnection Facilities, or as may be otherwise prudent in accordance with Good Utility Practice, and shall have the ability to be present during such tests.

6.2 Responsibility for Modifications Following Testing. Based upon the pre-operational testing, Generator is responsible for making any modifications necessary to ensure the safe and reliable operation of Generator’s Interconnection Facilities in accordance with Good Utility Practice; the Project Manager, and to the extent applicable PNM and TNMP, are responsible for making any modifications necessary to ensure the safe and reliable operation of the Luna Interconnection Facilities, and each Utility is responsible for making any modification necessary to ensure the safe and reliable operation of Interconnection System Upgrades on its transmission system, in accordance with Good Utility Practice. The costs of all such modifications are to be borne by Generator, except to the extent the modifications are required as a result of the sole negligence or willful misconduct of the Project Manager or the Luna Substation Owners (in the case of the Luna Interconnection Facilities) or one of the Utilities (in the case of the Interconnection System Upgrades on such Utility’s transmission system), or any Agent of either.

6.3 Documentation of Results to the Project Manager or the Operating Agent . Generator shall provide the Project Manager or the Operating Agent, as applicable, with complete documentation of all test results for all tests performed pursuant to Article 6.1.

6.4 Facility Certification. Generator shall comply with any facility certification requirements of NERC, WSCC, and the RTO (if applicable).

6.5 Transmission Service During Testing. Generator has sole responsibility to make necessary arrangements under the Utilities’ OATTs to procure any transmission service over the Utilities’ Transmission Systems that may be required to accommodate the testing procedures of the Facility.

6.6 Luna Substation Owners Inspection Rights. The Luna Substation Owners (which, for the purposes of this Article 6.6, shall be deemed to include the Operating Agent) shall have the right, but shall have no obligation or responsibility, to: (a) observe Generator’s tests and/or inspection of any of Generator’s Protective Equipment; (b) review the settings of

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Generator’s Protective Equipment; and (c) review Generator’s maintenance records relative to the Generator’s Protective Equipment. The Luna Substation Owners may exercise the foregoing rights from time to time as they deem necessary upon five (5) Business Days’ written notice to Generator. However, the exercise or non-exercise by the Luna Substation Owners of any of the foregoing rights of observation, review or inspection shall be construed neither as an endorsement or confirmation of any aspect, feature, element, or condition of the Facility or Generator’s Protective Equipment or the operation thereof, nor as a warranty as to the fitness, safety, durability, or reliability of same.

6.7 Generator Inspection Rights. Generator, upon five (5) Business Days’ advance written notice to the Operating Agent and the Luna Substation Owners, has the right, but not the obligation, to inspect or observe the operation and maintenance activities, equipment tests, installation, construction, or other modifications to the Luna Interconnection Facilities which could cause a material adverse effect on Generator’s operations.

6.8 Luna Substation Owners Reviews, Inspections, and Approvals. Any Luna Substation Owner’s or Operating Agent’s review, inspection, and approval related to the Generator’s Interconnection Facilities and the Protective Equipment required under this Agreement shall not be unreasonably withheld or delayed, and will be limited to the purpose of ensuring the safety, reliability, protection and control of the Luna Substation, the SWNMT and the Utilities’ Transmission Systems.

ARTICLE VII

I NTERCONNECTION F ACILITY C OSTS AND B ILLING

7.1 Interconnection Construction Completion and Cost.

7.1.1 Notification of Delay. If any event occurs that will materially affect the time for completion of the Luna Interconnection Facilities, or the Protective Equipment, or the ability to complete them, the Project Manager shall, within five (5) Business Days of its knowledge of any such event, notify Generator. If any event occurs that will materially affect the time for completion of any Interconnection System Upgrades, or the ability to complete them, the Utility responsible for making the affected Interconnection System Upgrade shall, within five (5) Business Days of its knowledge of any such event, notify Generator and the other Parties. In such circumstances, the Project Manager, and to the extent necessary PNM and TNMP, or such Utility, as the case may be, shall, within ten (10) Business Days of notifying Generator of such an event and corresponding delay, convene a technical meeting with Generator to evaluate the alternatives available to Generator. The Project Manager, and to the extent necessary PNM and TNMP, or such Utility, as the case may be, also shall make available to Generator all studies and work papers related to the event and corresponding delay, including all information that is in their/its possession that is reasonably needed by Generator to evaluate alternatives.

7.1.2 Cost Estimate. While, pursuant to Article 5.4.3, the Project Manager, and to the extent necessary PNM and TNMP, and each Utility agree to provide Generator with their best estimate of the cost required to construct and install the Luna

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Interconnection Facilities and Protective Equipment, and Interconnection System Upgrades, as described in Appendix B, such estimate shall not be binding. Generator has the right to approve any deviation in the scope of the work shown in Appendix B if such deviation would result in an estimated increase of ten percent (10%) or more over the cost shown in Appendix B. The actual cost of the Luna Interconnection Facilities, Protective Equipment, and Interconnection System Upgrades shall be incurred in accordance with Good Utility Practice.

7.1.3 Audit of Cost . Generator shall have the right to receive such cost information as is reasonably necessary to verify the cost of the Luna Interconnection Facilities, the Protective Equipment, and Interconnection System Upgrades and that such cost was incurred in accordance with Good Utility Practice. Generator shall have the right to audit (a) the Project Manager’s, and to the extent applicable PNM’s and TNMP’s, accounts and records pertaining to the Luna Interconnection Facilities and Protective Equipment under this Agreement, and (b) a Utility’s accounts and records pertaining to any Interconnection System Upgrades made to the Utility’s transmission system under this Agreement, at the offices where such accounts and records are maintained, provided at least seven (7) Business Days’ notice is given prior to any audit, and provided further that the audit shall be limited to those portions of such accounts and records that relate to services provided under this Agreement. Costs billed pursuant to this Agreement for the design, engineering, procurement, and construction of the Luna Interconnection Facilities, Protective Equipment, and the Interconnection System Upgrades shall be subject to audit for a period of one (1) year following issuance of a final cost invoice in accordance with Article 7.2.2. All other costs billed pursuant to this Agreement shall be subject to audit for a period of one (1) year after the date the bill was rendered. The Project Manager, and to the extent applicable PNM and TNMP, and each Utility shall keep records and data related to all costs billed under this Agreement for a period equivalent to the audit periods described in this Article 7.1.3.

7.2 Invoices and Payments.

7.2.1 Monthly Statements. The Project Manager, Luna Substation Owners or the applicable Utility, as the case may be, shall render to Generator monthly statements for the Luna Interconnection Facilities and the Protective Equipment by certified mail, facsimile or other acceptable means conforming to the provisions of Article 30.9. Each Utility shall render to Generator monthly statements for the Interconnection System Upgrades on its transmission system by certified mail, facsimile, or other acceptable means conforming to the provisions of Article 30.9. Such statements shall set forth in reasonable detail any costs incurred by or on behalf of the Luna Substation Owners or the applicable Utility, as the case may be, or other charges or amounts payable by Generator under the terms of this Agreement for the previous month in connection with the Luna Interconnection Facilities, the Protective Equipment and Interconnection System Upgrades. Generator shall make payment of the amount shown to be due to the Project Manager, Luna Substation Owners or the applicable Utility, as the case may be, by wire transfer to an account

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specified by the Project Manager, Luna Substation Owners or such Utility not later than the thirtieth (30th) day after receipt of the statement, unless such day is not a Business Day, in which case Generator shall make payment on the next Business Day. All such payments shall be deemed to be made when said wire transfer is received by the Project Manager, Luna Substation Owners or the applicable Utility, as the case may be. Overdue payments shall accrue interest daily at the then-current Interest Rate from the due date of such unpaid amount until the date paid.

7.2.2 Invoice of Final Cost . Within nine (9) months after completion of the construction of the Luna Interconnection Facilities and the Protective Equipment, the Project Manager, Luna Substation Owners or the applicable Utility, as the case may be, shall provide an invoice of the final cost of the Luna Interconnection Facilities and the Protective Equipment and the net amount due, if any, from Generator allowing for any payments made by Generator pursuant to this Agreement. Within nine (9) months after completion of the construction of the Interconnection System Upgrades on a Utility’s Transmission System, such Utility shall provide an invoice of the final cost of such Interconnection System Upgrades and the net amount due, if any, from Generator allowing for any payments made by Generator pursuant to this Agreement. The final cost invoice shall set forth in reasonable detail the actual costs incurred by or on behalf of the Luna Substation Owners or the applicable Utility in designing, procuring, constructing, installing and testing the Luna Interconnection Facilities and Protective Equipment, or Interconnection System Upgrades, and shall set forth such costs in sufficient detail to enable Generator to compare the actual costs with the estimates and to ascertain deviations, if any, from the cost estimates. Generator shall reimburse the Project Manager, Luna Substation Owners, or the Utility, as the case may be, for the amount of such invoice within thirty (30) days after receipt of such invoice, unless such day is not a Business Day, in which case Generator shall make payment on the next Business Day.

7.2.3 Failure of Payment . In the event Generator fails, for any reason other than a billing dispute as described below, to make payment to the Project Manager, Luna Substation Owners or a Utility, as the case may be, on or before the due date as described above, an event of breach by Generator shall be deemed to exist under Article 22.2(a). In the event of a billing dispute between the Project Manager, Luna Substation Owners or a Utility and Generator, the Project Manager, Luna Substation Owners and such Utility shall continue to perform their responsibilities under this Agreement and Generator shall not be deemed to have committed an event of breach under Article 22.2(a), as long as Generator (a) continues to make all payments not in dispute, and (b) upon request of the Project Manager, Luna Substation Owners or the Utility, as the case may be, pays into an independent escrow account the portion of the invoice in dispute, pending resolution of such dispute.

7.2.4 Billing Disputes . Generator may, in good faith, challenge the correctness of any bill rendered under this Agreement for the design, engineering, procurement, and construction of the Luna Interconnection Facilities, the Protective Equipment and the Interconnection System Upgrades no later than one (1) year following the

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issuance of a final cost invoice in accordance with Article 7.2.2. Generator may, in good faith, challenge the correctness of any other bill rendered under this Agreement no later than one (1) year after the date the bill was rendered. In the event that Generator challenges a bill or a portion prior to date on which payment is due for such bill, Generator shall nonetheless pay the portion of the bill that is not disputed when due, with notice given to the entity that rendered the bill at that time. Any challenge to a bill shall be in writing and shall state the specific basis for such challenge. If it is subsequently agreed or determined under Article XXIX that an adjustment is appropriate, such adjustment shall be made in accordance with Article 7.3.

7.3 Adjustments . In the event adjustments or corrections to monthly statements are required as a result of errors in computation or billing, the entity that rendered the monthly statement shall promptly recompute amounts due hereunder and otherwise correct any errors in such statements. If the total amount, as recomputed, due from Generator is less than the total amount due as previously computed, and payment of the previously computed amount has been made, the entity that received such payment shall pay the difference to Generator within thirty (30) days after correction of the erroneous invoice(s), together with interest at the Interest Rate. If the total amount, as recomputed, due from Generator is more than the total amount due as previously computed, and payment of the previously computed amount has been made, the entity that rendered the monthly statement shall invoice the difference to Generator according to the terms of Article 7.2; provided, however, that no adjustment for any statement or payment will be made unless objection to the accuracy thereof was made within the time frames described in Article 7.2.4; and provided further that this Article 7.3 will survive any termination of the Agreement for a period of one (1) year from the date of such termination for the purpose of such statement and payment objections.

7.4 Payment Not a Waiver . Payment of invoices by Generator shall not constitute a waiver of any rights or claims Generator may have under this Agreement.

7.5 Income Taxes . The Parties intend that any asset transfer or payments made by Generator to EPE, PNM and/or TNMP (the “taxpayers”) under the terms of this Agreement shall be non-taxable contributions to capital, in accordance with Section 118(a) of the Internal Revenue Code of 1986, as amended (the “Code”), IRS Notices 2001-82 and 88-129, and any applicable state tax laws and shall not be taxable as contributions in aid of construction under the Code and any applicable state tax laws. Except as provided below, the taxpayers shall not include a gross-up for income taxes in the amounts charged to Generator under this Agreement.

Notwithstanding the foregoing, to the extent any Governmental Authority determines that the taxpayers’ receipt of such payments or asset transfer constitutes income that is subject to taxation, Generator shall protect, indemnify and hold harmless the taxpayers for any tax, interest, or penalty associated with such determination. Generator’s liability under this Article 7.5 shall be calculated on a fully grossed-up basis by taking into account each taxpayer’s federal and state composite tax rate, and the present value of all tax depreciation deductions to which each taxpayer is entitled over the life of the capital improvements

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and/or assets acquired from such contributions by Generator, based on a discount rate of 8.00%. The taxpayers shall notify Generator, in writing, within thirty days of receiving notification of such determination by a Governmental Authority. Generator shall not be required to pay the taxpayers for such tax, interest and/or penalties prior to the seventh day before the date on which the taxpayers are required to pay the tax, interest and/or penalties.

Generator shall have the right to require the taxpayers, at Generator’s expense, to seek a Private Letter Ruling (including, if applicable, a Technical Advice Memorandum) from the Internal Revenue Service (“IRS”) as to whether any asset transfer by Generator to the taxpayers, or any of the sums paid by Generator to the taxpayers under the terms of this Agreement, are subject to federal income taxation. The taxpayers and Generator shall cooperate in good faith with respect to such request for a Private Letter Ruling. To the extent that a Private Letter Ruling is issued to one or more of the taxpayers concluding that such sums are not subject to federal income taxation, each such taxpayer shall promptly refund to Generator any amounts paid by Generator pursuant to this Article 7.5.

Although Generator and/or its representatives will prepare any request for a Private Letter Ruling, Generator shall also pay the reasonable internal costs directly incurred by EPE, PNM and/or TNMP as a result of cooperating with Generator’s request for a Private Letter Ruling, provided that EPE, PNM and/or TNMP provides Generator with written documentation to support such costs. Such internal costs may include, but are not limited to, long-distance telephone calls, printing and reproduction expenses, and the portion of salary and/or wages of personnel properly allocated to time spent on cooperating with such request for a Private Letter Ruling.

ARTICLE VIII

O PERATIONS

8.1 General . With respect to their performance under this Agreement, the Operating Agent, Luna Substation Owners, the Utilities, and Generator shall comply with all applicable manuals, standards, and guidelines of NERC, WSCC, RTO (if applicable), or any successor agency.

8.2 Obligations of Utilities and Operating Agent . Each of the Utilities shall operate and control its transmission system (including Interconnection System Upgrades), and the Operating Agent shall operate and control the Luna Interconnection Facilities, (a) in a safe and reliable manner, (b) in accordance with Good Utility Practice, and (c) in accordance with the terms and conditions of this Agreement. In the event of any conflict between the terms and conditions of this Agreement and applicable planning, operational, and/or reliability criteria, protocols, and directives of the RTO (if applicable), NERC and WSCC, the applicable planning, operational, and/or reliability criteria, protocols, and directives of the RTO (if applicable), NERC and WSCC shall govern.

8.3 Obligations of Generator .

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8.3.1 Synchronization . Generator shall assume all responsibility and cost for properly synchronizing the Facility for operation with the Operating Agent’s facilities. Synchronizing of generation will be coordinated with the Operating Agent’s SOCC.

8.3.2 Operation and Control . Generator shall operate and control the Facility and Generator’s Interconnection Facilities (a) in a safe and reliable manner, (b) in accordance with Good Utility Practice, and (c) in accordance with the terms and conditions of this Agreement. In the event of any conflict between the terms and conditions of this Agreement and applicable planning, operational, and/or reliability criteria, protocols, and directives of the RTO (if applicable), NERC and WSCC, the applicable planning, operational, and/or reliability criteria, protocols, and directives of the RTO (if applicable), NERC and WSCC shall govern.

8.3.3 Control Area Requirements . Nothing in this Agreement should be construed as creating any obligation that Generator operate the Facility as part of the any Utility’s control area. If the Facility is not operated as part of the Operating Agent’s control area, in no event shall this Agreement prohibit, prevent, or otherwise limit the ability of Generator to operate the Facility in accordance with the requirements of the control area of which it is part, and the Parties shall negotiate in good faith to amend this Agreement as necessary or appropriate.

8.4 Reliability Criteria

8.4.1 Power System Stabilizers (PSS) . Generator shall install and operate PSS on generators in accordance with the WSCC criteria, the RMS criteria and any other requirement that the Operating Agent is obligated to follow.

8.4.2 Automatic Voltage Regulation (AVR) . Generator shall install and operate AVR in accordance with all requirements of WSCC, the RMS criteria and any other requirement that the Operating Agent is obligated to follow. Each interconnected unit shall have AVR and such AVR shall be tuned in accordance with the Institute of Electronics and Electrical Engineers (“IEEE”) standard 421 or its successor. Voltage regulator controls and limit functions (such as over- and under-excitation and volts/hertz limiters) shall coordinate with the Facility’s generator’s short duration capabilities and protective relays. AVRs must be continuously acting solid state analog or digital. Tuning shall be in accordance with the WSCC criteria and standards. Tuning results shall be included in commissioning test reports provided to the Operating Agent or the Project Manager, as applicable.

8.4.3 Governors . Generator shall operate all governors in accordance with requirements of NERC and the WSCC, including any requirements for Governor Droop settings. To provide equitable and coordinated system response to load/generation imbalances, governors shall not be blocked or operated with excessive dead-bands.

8.5 Quality of Power . Generator shall ensure that the Facility’s quality of power at the Interconnected Facilities adheres to the standards set by NERC, WSCC, the RTO (if applicable) and the American National Standards Institute (“ANSI”). To the extent that the

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Operating Agent determines that the Luna Substation is adversely affected by flicker or harmonic distortion caused by Generator, or any of the Utilities determines that its transmission system is adversely affected by flicker or harmonic distortion caused by Generator, Generator shall take the necessary actions to resolve the problem promptly upon notice from the Operating Agent or such Utility. If such actions taken by Generator do not resolve the problem, the Operating Agent shall notify Generator of the continuing problem and may curtail, interrupt or reduce deliveries of electricity, or disconnect the Facility from the SWNMT at the Luna Substation, in accordance with Good Utility Practice until the problem is resolved to the satisfaction of the Operating Agent or Utilities, as the case may be. Generator shall be responsible for all damages caused by or that result from flicker or harmonic distortion due to Generator’s operation.

8.6 Protection and System Quality .

8.6.1 Facilities . Generator shall, at its expense, install, maintain, and operate Protective Equipment, including such protective and regulating devices as are required by the RTO (if applicable), NERC, WSCC, or by order, rule or regulation of any Governmental Authority or as are otherwise necessary to protect personnel and equipment and to minimize adverse effects to the Luna Substation, SWNMT and the Utilities’ electric systems arising from the Facility. Any such Protective Equipment that may be required at the Luna Substation in connection with the operation of the Facility and in accordance with Good Utility Practice shall be installed by the Project Manager at Generator’s expense. Any such Protective Equipment that may be required on the SWNMT in connection with the operation of the Facility and in accordance with Good Utility Practice shall be installed by the SWNMT Participants at Generator’s expense. Any such Protective Equipment that may be required on a Utility’s Transmission Systems in connection with the operation of the Facility and in accordance with Good Utility Practice shall be installed by such Utility at Generator’s expense.

8.6.2 Protective Equipment . Generator agrees that Protective Equipment must be installed to:

(a) ensure safety of the general public, and personnel of EPE (including in its capacities as Project Manager and Operating Agent), PNM, TNMP and Generator;

(b) minimize damage to the Luna Substation property, to the SWNMT, and to the property of the general public, each of the Utilities and their customers;

(c) minimize adverse operating conditions at the Luna Substation, on SWNMT, and on the Utilities’ Transmission Systems; and

(d) permit Generator to operate the Facility in parallel with the SWNMT and the Utilities’ Transmission Systems in a safe and efficient manner.

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The necessary Protective Equipment will be installed in accordance with Articles 5.3.2 and 5.4.3.

8.7 Adjustments . The Operating Agent may require Generator to adjust the real power output from the Facility only for purposes of an Emergency or Abnormal Conditions. The Operating Agent may not, unless the Generator and Operating Agent agree in writing, require Generator to make such adjustments based on economic considerations. The Operating Agent shall reasonably allocate the responsibility to provide real power support to the transmission system during an Emergency or Abnormal Condition on an equitable, non-discriminatory basis with respect to all generating units available to the Operating Agent. The Operating Agent, or any other Party as applicable, will compensate Generator for increasing or decreasing real power output, except for reductions, interruptions or curtailments under the applicable OATT, pursuant to mutually agreed terms or pursuant to any applicable FERC-accepted tariff or rate schedule filed by Generator.

8.8 Interconnected Operation Services . If an Emergency or Abnormal Condition occurs that requires the Operating Agent to request any interconnected operation services, which services may include first response service from Generator, then the Operating Agent, or EPE, PNM or TNMP, as applicable, will compensate Generator pursuant to mutually agreed terms or pursuant to any applicable FERC-accepted tariff or rate schedule filed by Generator.

8.9 Switching and Tagging Procedures .

8.9.1 Compliance with Procedures . The Parties shall abide by the Operating Agent’s switching and tagging rules as the Operating Agent may modify them from time to time with respect to activities at the Facility, the Interconnected Facilities or the Luna Substation. The Operating Agent shall notify the other Parties in advance of any changes in the Operating Agent’s switching and tagging rules. Generator shall ensure its personnel are trained and knowledgeable regarding Operating Agent’s switching and tagging rules and grounding and isolation procedures.

8.9.2 Reclosing . Generator acknowledges that following an electric disturbance, certain equipment at the Luna Substation, on the SWNMT or on the Utilities’ Transmission Systems may reclose in accordance with Good Utility Practice. The Operating Agent will provide Generator notice, as far in advance of implementation as is practical, of the reclosing practices of the Luna Interconnection Facilities including Luna Substation. The Operating Agent shall provide Generator all data needed to study the effect of proposed changes to such reclosing practices and allow a reasonable time period, not to exceed 120 calendar days, for modification of Generator’s Protective Equipment if necessary. To the extent practicable, Operating Agent will cooperate with Generator to establish or modify the reclosing angle settings of the Operating Agent’s reclosing operations to minimize the impact such operations will have on the SWNMT, the Utilities’ Transmission Systems and the Facility.

Generator shall have sole responsibility for protecting the Facility, Generator’s Interconnection Facilities and related equipment from any damage resulting from

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such reclosure. To the extent not prohibited by Applicable Laws and Regulations, Generator hereby indemnifies and agrees to hold harmless the Project Manager, the Operating Agent, the Luna Substation Owners, SWNMT Participants, Utilities and their Agents for, against and from any and all losses, damages, costs and expenses caused by, resulting from or arising out of (a) any damage to the Facility, Generator’s Interconnection Facilities or related equipment to the extent caused by, resulting from, or arising out of any such reclosure and (b) death of or injury to any person to the extent caused by, resulting from, or arising out of any impact or effect of any such reclosure upon the Facility, Generator’s Interconnection Facilities, and/or any related equipment.

If, for any reason, the Facility is disconnected from the SWNMT at the Luna Substation (by electric disturbance, line switching, or otherwise), the Operating Agent shall cause the switching device connecting the Facility to the SWNMT at the Luna Substation to become and remain open and not reclose until the Operating Agent approves the reclosure.

8.10 General Orders . Each Party shall comply with the Operating Agent’s General Orders, in existence on the Effective Date and as may be modified from time to time, in the operation of the Interconnected Facilities and the Facility. The Operating Agent shall provide a written copy of its General Orders upon request of Generator and thereafter notify Generator of any modifications in the Operating Agent’s General Orders at least ten (10) days prior to the effective date of any such modifications.

8.11 Generation Alert . The Operating Agent shall issue generation alerts when it determines that the loss of a generating unit may create a system disturbance. When advised by the Operating Agent, Generator shall exercise Due Diligence to suspend non-essential maintenance and operational activities that could lead to the loss of the Facility during the alerts.

ARTICLE IX

R ELIABILITY M ANAGEMENT S YSTEM

9.1 Purpose. In order to maintain the reliable operation of the transmission grid, the WSCC Reliability Criteria Agreement sets forth reliability criteria adopted by the WSCC with which Generator and the Utilities shall comply.

9.2 Compliance. Generator shall comply with the requirements of the WSCC Reliability Criteria Agreement, including the applicable WSCC reliability criteria set forth in Section IV of Annex A thereof, and, in the event of failure to comply, agrees to be subject to the sanctions applicable to such failure. Such sanctions shall be assessed pursuant to the procedures contained in the WSCC Reliability Criteria Agreement.

9.3 Participant Status. Each of the provisions of the WSCC Reliability Criteria Agreement is hereby incorporated by reference into this Article IX as though fully set forth herein, and Generator shall for all purposes be considered a “Participant,” as defined in the WSCC

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Reliability Agreement, and shall be entitled to all of the rights and privileges and subject to all of the obligations of a Participant under and in connection with the WSCC Reliability Criteria Agreement, including the rights, privileges, and obligations set forth in Sections 5, 6, and 10 of the WSCC Reliability Criteria Agreement.

9.4 Payment of Sanctions . Generator shall be responsible for payment of any monetary sanction assessed against Generator by WSCC pursuant to the WSCC Reliability Criteria Agreement. To the extent any monetary sanction is attributable, in whole or in part, to Generator’s negligence, intentional act or omission, or willful misconduct and is assessed against any Utility by WSCC pursuant to the WSCC Reliability Criteria Agreement, Generator shall reimburse such Utility for the portion of the sanction attributable to Generator’s negligence, intentional act or omission, or willful misconduct.

9.5 Transfer of Control or Sale of Facility . In any sale or transfer of control of the Facility or any portion thereof, Generator shall, as a condition of such sale or transfer of control, require the acquiring party or transferee with respect to the transferred Facility either to assume the obligations of the Generator with respect to this Agreement or to enter into an agreement with the other Parties hereto imposing on the acquiring party or transferee the same obligations applicable to Generator pursuant to this Article IX.

9.6 Failure to Comply with RMS . In the event Generator fails to comply with the requirements of the WSCC Reliability Criteria Agreement incorporated herein and, in the opinion of the Operating Agent, endangers the safety or reliability of the Luna Substation, the SWNMT, or any of the Utilities’ Transmission Systems, the Operating Agent shall have the right, subject to Applicable Laws and Regulations, to disconnect the Facility from the SWNMT at the Luna Substation. Prior to any proposed disconnection pursuant to this Article 9.6, the Operating Committee shall meet, and the Operating Agent shall advise the members of the Operating Committee of the reasons for the proposed disconnection.

9.7 Publication . Generator consents to the release by the WSCC of information related to Generator’s compliance with this Agreement only in accordance with the WSCC Reliability Criteria Agreement.

9.8 Third Parties . Except for the rights and obligations between the WSCC and Generator specified in this Article IX, this Article IX creates contractual rights and obligations solely between the Parties. Nothing in this Article IX shall create, as between the Parties or with respect to the WSCC: (a) any obligation or liability whatsoever (other than as expressly provided in this Article IX) or (b) any duty or standard of care whatsoever. In addition, nothing in this Article IX shall create any duty, liability, or standard of care whatsoever as to any other Party. Except for the rights, as a third-party beneficiary under this Article IX of the WSCC against Generator, no third party shall have any rights whatsoever with respect to enforcement of any provision of this Article IX. The Parties expressly intend that the WSCC is a third-party beneficiary to this Article IX and the WSCC shall have the right to seek to enforce against Generator any provision of this Article IX, provided that specific performance shall be the sole remedy available to the WSCC pursuant to Article IX and Generator shall not be liable to the WSCC pursuant to this Article IX for damages of any

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kind whatsoever (other than the payment of sanctions to the WSCC, if so construed), whether direct, compensatory, special, indirect, consequential, or punitive.

9.9 Reserved Rights. Nothing in the RMS or the WSCC Reliability Criteria Agreement shall limit the right of any of the Utilities, subject to any necessary regulatory approvals, to take such other actions to maintain reliability, subject to any necessary regulatory approval, including disconnection, which any of the Utilities may otherwise be entitled to take.

9.10 Termination. The Generator may terminate its obligations pursuant to this Article IX: (a) if after the effective date of this Agreement, the requirements of the WSCC Reliability Criteria Agreement applicable to Generator are amended so as to adversely affect the Generator, provided that Generator gives fifteen (15) days’ notice of such termination to the other Parties and the WSCC within forty-five (45) days of the date of issuance of a FERC order accepting such amendment for filing, provided further that the forty-five (45) day period within which notice of termination is required may be extended by the Generator for an additional forty-five (45) days if the Generator gives written notice to the other Parties of such requested extension within the initial forty-five (45) day period; or (b) for any reason on one (1) year’s written notice to the other Parties and the WSCC.

9.1 1 Mutual Agreement. This Article IX may be terminated at any time by mutual agreement of Generator and the other Parties.

9.12 Severability . If one or more provisions of this Article IX shall be invalid, illegal or unenforceable in any respect, it shall be given effect to the extent permitted by Applicable Laws and Regulations, and such invalidity, illegality or unenforceability shall not affect the validity of the other provisions of this Article IX.

ARTICLE X

R EACTIVE P OWER

10.1 Obligation to Supply Reactive Power . Generator shall supply reactive power to the transmission system in accordance with Good Utility Practice, and shall respond to requests from the Operating Agent to increase or decrease generator output voltage in a manner consistent with Generator’s obligation to operate the Facility, provided such requests are consistent with Good Utility Practice and are made in order to maintain reactive area support. The Facility shall operate in accordance with the reactive power requirements as set forth in this Agreement; provided, however, that such amount shall not exceed the amount available from the Facility’s equipment in service.

10.2 Compensation . The Operating Agent shall compensate Generator for increasing or decreasing reactive power at the specific request of the Operating Agent outside the power factor design limitation minimum requirement specified in Article 10.3.1. Such compensation shall be in accordance with any applicable FERC tariff or rate schedule filed by Generator and accepted for filing by FERC. Each of the Parties (including EPE in its capacity as Operating Agent) reserves its right to oppose any tariff or rate schedule filed by Generator with FERC.

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10.3 Reactive Power Standards.

10.3.1 Composite Power Delivery. The Facility power factor design limitation minimum requirement shall be a reactive power capability sufficient to provide a composite power delivery at the Interconnection Point at a power factor between 95% lagging and 95% leading. Under normal real-time operating conditions, Generator shall operate the Facility to maintain a voltage schedule at the Interconnection Point as prescribed by the Operating Agent or designated representative within the Facility’s power factor design limitation minimum requirement, provided such schedule is consistent with Good Utility Practice and necessary to maintain reactive support on the transmission system. In the event that the voltage schedule at the Interconnection Point cannot be or is not maintained within such requirement, the Operating Agent may request that the Facility be operated (within the design limitations of the equipment in service at that time) up to the maximum available reactive power output (measured in MVAR) in order to achieve the prescribed voltage schedule; provided, however, that the Operating Agent has equitably coordinated such requests with other generating facilities and other reactive power compensation resources in the affected area in order to achieve the prescribed voltage schedule. Generator shall promptly comply with all such requests made by the Operating Agent and shall be compensated as provided for in Article 10.2.

10.3.2 Compliance. In the event that under normal transmission system operating conditions, the Facility is unable to consistently maintain a reactive power capability within the power factor design limitation minimum requirement, Generator shall take appropriate actions to comply with such standards, including, if necessary, the installation of static and/or dynamic reactive power compensating devices.

10.3.3 Records. Records of requests made to Generator by the Operating Agent, and records indicating actual responses to such requests, shall be maintained by the Operating Agent and subject to a third party independent audit at Generator’s request and expense. Any request for an audit by Generator shall be made in accordance with the second sentence of Article 7.1.3.

10.4 Failure to Supply Reactive Power. To the extent that Generator fails to operate the Facility in accordance with this Article X and Generator has not taken any action pursuant to Article 10.3.2, the Operating Agent may, after three (3) days’ notice to Generator, take any necessary actions to remedy Generator’s default, at Generator’s expense, including requiring the installation of capacitor banks or other reactive compensation equipment required to ensure the proper voltage or reactive power supply at the Facility.

ARTICLE XI

O UTAGES , I NTERRUPTIONS , AND D ISCONNECTIONS

11.1 Outage Scheduling. On or before January 1st of each year, or such other date mutually acceptable to the Operating Agent and Generator, each of the foregoing shall, subject to Article 3.7, provide to the other a non-binding preliminary maintenance schedule for the upcoming calendar year for the Luna Substation, the Luna Interconnection Facilities and

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Facility. The Operating Agent and Generator shall, subject to Article 3.7, each provide the other with timely non-binding updates to such schedules to reflect any significant changes.

11.2 Scheduled Maintenance and Coordination. To the extent practicable, the Operating Agent, and PNM and TNMP as necessary, shall schedule any testing, shutdown, or withdrawal of Luna Substation and Luna Interconnection Facilities, to coincide with Generator’s scheduled outages or, if not possible, during times acceptable to the Generator. The Operating Agent, and PNM and TNMP as necessary, shall, subject to Article 3.7, notify Generator in advance of any such testing, shutdown, or withdrawal of facilities and the schedule for maintenance as well as any changes in the schedule. The Operating Agent shall restore the Luna Interconnection Facilities and Luna Substation to service as quickly as possible in accordance with Good Utility Practice.

11.3 Other Maintenance and Coordination.

11.3.1 To the extent that Generator desires the Luna Substation Owners or the Operating Agent to perform maintenance during a time period other than a scheduled outage, the Luna Substation Owners and the Operating Agent shall use Commercially Reasonable Efforts to meet Generator’s request; provided, however, that such maintenance will not have a material adverse economic impact upon the Luna Substation Owners or the customers of the Utilities’ Transmission Systems. If the Luna Substation Owners or any of the Utilities determines, in the exercise of its reasonable judgment, that Generator’s request would have a material adverse economic impact upon the Luna Substation Owners or the customers of the Utility’s Transmission Systems, but Generator is willing to reimburse the Luna Substation Owners or the Utility for any costs incurred by them, the Luna Substation Owners and the Utility shall use Commercially Reasonable Efforts to comply with Generator’s request.

11.3.2 The Operating Agent agrees to perform any maintenance upon the Interconnected Facilities requested by Generator, provided that such maintenance is consistent with Good Utility Practice. The Operating Agent will notify Generator in advance of undertaking such maintenance as to the work expected to be done and an estimate of the expected cost. Generator reserves the right to withdraw such request any time prior to the commencement of such maintenance, provided Generator shall pay all costs resulting from the scheduling and cancellation of such maintenance, including penalties and non-refundable expenses.

11.4 Unplanned Outages. In the event of an unplanned outage of a Party’s facility (including the Facility) that adversely affects any of the other Parties’ facilities, the Party that owns or controls the facility that is out of service shall use Commercially Reasonable Efforts to promptly restore that facility to service in accordance with Good Utility Practice and, subject to Article 3.7, to promptly notify the other Parties as to the expected duration of the unplanned outage and, to the extent known, the reason therefor.

11.5 Disconnection.

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11.5.1 Disconnection during Underfrequency Load Shed Event. The Parties shall at all times comply with NERC, WSCC, and RTO (if applicable) requirements. NERC planning criteria require the interconnected WSCC Grid frequency be maintained between 59.95 Hz and 60.05 Hz. WSCC has an off-nominal frequency program to which the EPE Transmission System adheres and all generators must also comply. In the event of an underfrequency system disturbance, the EPE Transmission System is designed to automatically activate a multi-tiered load shed program. Generator shall coordinate underfrequency relay set points for the Facility as determined by the Operating Committee, consistent with WSCC criteria.

11.5.2 Disconnection after Agreement Terminates. Upon termination of this Agreement, the Operating Agent shall disconnect the Facility from SWNMT at the Luna Substation in accordance with the disconnection plan adopted pursuant to Article 23.4.

11.6 Continuity of Service. Notwithstanding any other provision of this Agreement, the Operating Agent shall not be obligated to accept, and the Operating Agent may require Generator to curtail, interrupt or reduce, delivery of energy if such delivery of energy impairs the Utilities’ ability to construct, install, repair, replace or remove any of their equipment or any part of their system in a safe and reliable manner or if the Operating Agent determines that curtailment, interruption or reduction is necessary to prevent, mitigate, or remedy an Emergency or for any reason otherwise permitted by Applicable Laws and Regulations. The Parties shall coordinate, and if necessary negotiate in good faith, the timing of such curtailments, interruptions, or reductions with respect to maintenance, investigation or inspection of any of the Utilities’ equipment or system consistent with the terms and conditions of this Agreement. Except in case of Emergency, in order not to interfere unreasonably with Generator’s operations, the Operating Agent shall give Generator reasonable prior notice of any proposed curtailment, interruption or reduction, the reason(s) for its occurrence, and, if it is known, its expected duration. With respect to any curtailment, interruption or reduction permitted under this Article 11.6, the Operating Agent agrees that: (a) the curtailment, interruption, or reduction shall continue only for so long as reasonably necessary under Good Utility Practice; and (b) when the curtailment, interruption, or reduction must be made under circumstances which do not allow for advance notice, the Operating Agent will notify Generator by telephone as soon as practicable of the reasons for the curtailment, interruption, or reduction and, if known, its expected duration.

ARTICLE XII

E MERGENCY AND A BNORMAL C ONDITION P ROCEDURES

12.1 Emergency. During an Emergency as declared by the Operating Agent, in its sole discretion and consistent with Good Utility Practice, or the Security Coordinator as appointed by WSCC for the Operating Agent’s region, the Operating Agent has the sole discretion to direct Generator to increase or decrease real power production (measured in MW) and/or reactive power production (measured in MVAR), within the design and operational limitations of the Facility equipment in service at the time. The Operating

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Agent shall have sole discretion, exercised in accordance with Good Utility Practice, to determine that: (a) the transmission system security is threatened, and (b) any generator(s) connected to the transmission system must increase or decrease real power and/or reactive power production. Generator shall follow the Operating Agent’s orders and directives concerning Facility real power and/or reactive power output within the design limitations of the Facility’s equipment in service at the time. The Operating Agent shall restore the transmission system conditions to normal as quickly as possible to alleviate any such Emergency. The Operating Agent shall reasonably allocate the responsibility to provide real power and/or reactive power support to the transmission system during an Emergency on an equitable, non-discriminatory basis with respect to all generating units and other reactive compensation resources available to the Operating Agent. The Operating Agent, or any other Party as applicable, will compensate Generator, for an increase or decrease in real power output in compliance with Operating Agent’s directive, except for reductions, interruptions or curtailments under the applicable OATT, pursuant to mutually agreed terms or pursuant to any applicable FERC-accepted tariff or rate schedule filed by Generator.

12.2 Notice of Emergency. The Operating Agent shall provide Generator with prompt verbal or electronic notice of any Emergency which may reasonably be expected to affect Generator’s operations of the Facility, and Generator shall provide the Operating Agent with prompt verbal notice of any generation equipment Emergency which may reasonably be expected to affect the Operating Agent’s operations. Such verbal notification shall be followed within twenty-four (24) hours with written notification, which shall describe in reasonable detail the extent of the Emergency (including damage or deficiency), the anticipated length of the outage, and the corrective actions taken.

12.3 Immediate Action. In the event of an Emergency, the Party (either the Operating Agent or Generator) becoming aware of the Emergency may, in the exercise of its reasonable judgment and in accordance with Good Utility Practice, take such actions as are reasonable and necessary to prevent, avoid, or mitigate injury, danger, and loss, without liability to the other Parties for its actions.

12.3.1 In the event that Generator has identified an Emergency involving the transmission system, Generator shall obtain the consent of the Operating Agent before manually performing any switching operations unless, in Generator’s reasonable judgment, exercised in accordance with Good Utility Practice, immediate action is required.

12.3.2 Either the Operating Agent or Generator shall have the right to disconnect the Facility without prior notice or liability to the other Party if, in such Party’s reasonable judgment and in accordance with Good Utility Practice, an Emergency exists and immediate disconnection is required to protect persons or property from damage caused by Generator’s interconnection or lack of proper or properly operating protective devices. Prior to an Emergency, for purposes of this Article 12.3.2, the Operating Agent may deem protective devices to be operating improperly if the Operating Agent’s review pursuant to Article XIII discloses insufficient maintenance on such devices or that maintenance records do not exist or are insufficient to establish that adequate maintenance on such devices has been

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performed, provided that the Operating Agent shall inform Generator, in writing following the Operating Agent’s review, of such conclusions regarding maintenance of such devices and provide Generator a reasonable opportunity to demonstrate to the Operating Agent’s satisfaction that adequate maintenance has been performed. The Party initiating the disconnection shall notify the other Party of such disconnection as soon as reasonably possible after the disconnection.

12.4 Disconnection of Facility in Event of Potential Emergency. If, at any time, the Operating Agent determines, in the exercise of its reasonable judgment and in accordance with Good Utility Practice, that the continued operation of the Facility would cause an Emergency, the Operating Agent may disconnect the Facility from the Luna Substation until such condition giving rise to the potential Emergency ceases to exist. The Operating Agent shall not be liable to Generator for the Operating Agent’s actions unless such action constitutes willful misconduct on the part of the Operating Agent.

12.4.1 Notice of Disconnection. The Operating Agent shall provide Generator with as much advance notice as is reasonably practical under the circumstances of Operating Agent’s intent to disconnect the Facility in response to a condition that would cause an Emergency. Subject to Article 3.7, the Operating Agent shall also provide Generator with information relating to the nature of the potential Emergency and the expected duration of the disconnection at the Interconnection Point.

12.4.2 Opportunity to Resolve Condition. To the extent reasonably practical, if the condition that would cause the Emergency is at the Facility, the Operating Agent shall allow Generator an opportunity to remove or remedy such condition at the Facility before the Operating Agent disconnects the Facility.

12.4.3 Conference Regarding Condition. In the event of disconnection, the Operating Agent shall promptly confer with one of Generator’s Operating Committee representatives regarding the condition that gave rise to the disconnection. The Operating Agent shall provide Generator with its recommendation, if any, regarding the timely correction of the condition.

12.4.4 Restoration. The Operating Agent shall promptly reconnect the Facility when the condition giving rise to the potential Emergency ceases to exist and shall use reasonable efforts consistent with Good Utility Practice to minimize the duration of any disconnection.

12.5 Audit Rights. The Operating Agent and Generator shall keep and maintain records of any actions taken during an Emergency that may reasonably be expected to impact the others’ facilities and shall make such records available for review by the other or its auditor upon the request and expense of the other. Any request for such an audit shall be made no later than twenty-four (24) months following the actions taken in conjunction with the Emergency.

12.7 Abnormal Conditions. To the extent the Operating Agent is aware of any Abnormal Condition, the Operating Agent will provide Generator with reasonably prompt oral

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notification of such Abnormal Condition if it may reasonably be expected to affect Generator’s Facility or operations. To the extent that Generator is aware of any Abnormal Condition, Generator will provide the Operating Agent with reasonably prompt oral notification of such Abnormal Condition if it may reasonably be expected to affect the operations of the Operating Agent’s or any Utilities’ facilities. Subject to Article 3.7, any such oral notification provided hereunder shall include a description of the Abnormal Condition, its anticipated duration, and the corrective action taken and/or to be taken with respect to the notifying Party’s facilities, and shall be followed as soon as practicable with written confirmation of the facts. Each Party shall cooperate and coordinate with the other Parties in taking whatever corrective measures on its facilities as are reasonably necessary to mitigate or eliminate the Abnormal Condition, including, to the extent necessary, adjusting the operation of equipment to within its rated operating parameters; provided, however, that such measures are consistent with Good Utility Practice and do not require operation of any of the Parties’ facilities outside their operating limits.

ARTICLE XIII

M AINTENANCE

13.1 The Operating Agent Obligations. The Operating Agent shall maintain and repair/replace the Luna Interconnection Facilities, and each Utility shall maintain and repair/replace any Interconnection System Upgrades on its transmission system: (a) in a safe and reliable manner; (b) in accordance with Good Utility Practice; and (c) in accordance with the terms and conditions of this Agreement.

13.2 Generator Obligations. Generator shall maintain and repair/replace the Facility and Generator’s Interconnection Facilities: (a) in a safe and reliable manner; (b) in accordance with Good Utility Practice; and (c) in accordance with the terms and conditions of this Agreement.

13.3 Maintenance Expenses. In accordance with Articles 5.3 and 5.4 and subject to Article 5.14, Generator shall be responsible for all expenses associated with maintaining and repairing/replacing the Interconnected Facilities. The Operating Agent agrees to provide Generator in June of each year with its best estimate of the costs required to operate and maintain the Luna Interconnection Facilities over the next twelve (12) months. The Operating Agent will notify Generator in advance of any increase in the cost of work to be performed if the total amount increases by twenty-five percent (25%) or more of the estimate provided to Generator. Any such increase shall be subject to Generator’s authorization, which shall not be unreasonably delayed, withheld or denied. In accordance with Article 5.4.2, each Utility shall be responsible for all expenses associated with maintaining and repairing/replacing Interconnection System Upgrades on its transmission system after the Operation Date.

13.4 Coordination. Generator agrees to coordinate with the Operating Agent in accordance with procedures developed by the Operating Committee, regarding the inspection, maintenance, and testing of those secondary systems in the Facility and Interconnected Facilities directly affecting the operation of the Luna Substation, the SWNMT and the Utilities’ Transmission

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Systems. To the extent possible, Generator shall provide five (5) Business Days advance written notice to the Operating Agent before undertaking such work in these areas, especially in electrical circuits involving circuit breaker trip and close contacts, current transformers, or potential transformers.

13.5 Observation of Deficiencies. Each Party shall have the right, but not the obligation, to observe the testing and maintenance activities performed by the other Parties with respect to facilities whose performance may adversely affect the reliability of the observing Party’s facilities. If the observing Party observes any deficiencies or defects associated with, or becomes aware of a lack of maintenance, inspections, or testing with respect to, any of the other Parties’ facilities and equipment that might be reasonably expected to adversely affect the observing Party’s facilities and equipment, the observing Party shall provide prompt written notice to such other Party. Notwithstanding the foregoing, the observing Party shall have no liability for failure to give such notice. Upon receipt of such written notice, such Party shall take any necessary corrective actions in accordance with Good Utility Practice.

13.6 Review of Maintenance Records. Upon ten (10) Business Days’ written notice to Generator, Generator shall provide the Operating Agent with access to Generator’s maintenance, inspection, and testing records for Generator’s Interconnection Facilities and any other facilities whose operation may reasonably be expected to affect the reliability of the Luna Interconnection Facilities and the Luna Substation. The other facilities shall include, but not be limited to, generator step up transformers, protection systems, metering, communications systems, breakers, automatic voltage regulators, generator governor and excitation systems. Upon ten (10) Business Days’ written notice to the Operating Agent, the Operating Agent shall, subject to Article 3.7, provide Generator with access to the Operating Agent’s maintenance, inspection, and testing records for the Luna Interconnection Facilities and the Luna Substation.

ARTICLE XIV

M ETERING

14.1 General. Prior to the Operation Date, the Project Manager shall provide, install, and maintain Metering Equipment necessary to meet the obligations of the Luna Substation Owners under this Agreement. Beginning on the Operation Date, the Operating Agent shall assume responsibility for operating and maintaining the Metering Equipment. The ownership of the Metering Equipment by each of the Luna Substation Owners shall be in the same percentage as the ownership interest each holds in the SWNMT at Luna Substation. At the Operating Agent’s option, the Metering Equipment shall be located or adjusted in such a manner to account for any transformation or interconnection losses between the location of the meter and the Interconnection Point. The location of the Metering Equipment and Generator’s verification meters are identified on Appendix D.

14.2 Testing. The Operating Agent shall inspect and test Metering Equipment on an annual basis or at such other time intervals as may be directed by the Operating Committee; provided, however, that Generator, may request, after demonstrating good cause, one additional inspection and test for Metering Equipment per year. In addition, any Party may request a

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special test of meters, but such Party shall bear the cost of such testing unless an inaccuracy shall be disclosed exceeding one percent (1%), in which case the Operating Agent shall be responsible for the costs of the special testing. Authorized representatives of each Party shall have the right to be present at all routine or special tests and to inspect any readings, testing, adjustment or calibration of the meters. The Operating Agent shall promptly correct any inaccuracy disclosed through such inspections and tests. For the purpose of checking the performance of the Metering Equipment, Generator may install check metering equipment, which such equipment shall be owned and maintained by Generator.

14.3 Data Metered. The following data shall be real-time metered and sent electronically to the Operating Agent’s SOCC: (a) net MW output of each generator of the Facility; (b) reactive power output of each generator of the Facility, both positive and negative; (c) 345 kV bus voltage; (d) indications (open or closed) of all circuit breakers; (e) indications (open or closed) of all circuit switches; (f) various alarm points, as determined by the Operating Agent; (g) various relay indications and relay alarms; and (h) any other data as determined by the Operating Agent.

14.4 Data Available Upon Request. The Operating Agent shall provide to Generator and the other Parties all metering quantities in analog and/or digital form, whichever is available, upon request.

14.5 Costs. Except as otherwise provided for in this Article XIV, Generator shall bear all reasonable costs associated with (a) the installation and/or relocation of Metering Equipment, (b) the operation, maintenance, repair and administration of Metering Equipment, and (c) the provision of metering data to Generator. All such costs shall be separately stated on the invoice sent to Generator by the Project Manager or Operating Agent, as applicable.

ARTICLE XV

S AFETY

15.1 General. All work performed by a Party shall be performed in accordance with Good Utility Practice and all Applicable Laws and Regulations, Environmental Laws, and other requirements regarding the safety of persons and property.

15.2 Environmental Releases. No later than twenty-four (24) hours after a Party becomes aware of a Release of any Hazardous Substances, any asbestos or lead abatement activities, or any type of remediation activities, such Party shall provide written notice to the other Parties of such Release or activities, describing in reasonable detail the nature of such Release or activities. Such Party shall also promptly provide the other Parties with copies of any reports filed with any Governmental Authority regarding such Release or activities.

15.3 Other Environmental Impact. No Party shall take any action(s) knowing that such action(s) might be reasonably expected to have a material adverse environmental impact upon the operations of the other Parties without prior written notification and agreement between the Parties.

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ARTICLE XVI

C OMMUNICATIONS

16.1 Equipment. Generator, at its own expense, shall maintain satisfactory communications with the Operating Agent or its designated representative. At Generator’s expense, Generator shall install and maintain real-time operating communications with the Operating Agent’s SOCC to the satisfaction of the Operating Agent or its designated representative. The data circuit(s) shall extend from Generator’s Facility to a location(s) specified by the Operating Agent. Any required maintenance of such communications equipment shall be performed at Generator’s expense, but may be performed by Generator or by the Operating Agent.

16.2 Remote Terminal Unit. A Remote Terminal Unit (“RTU”) or equivalent data collection and transfer equipment acceptable to Generator and the Operating Agent shall be installed by Generator or by the Project Manager at Generator’s expense, to gather accumulated and instantaneous data to be telemetered to a location(s) designated by the Operating Agent through use of a dedicated point-to-point data circuit(s). Generator shall install or facilitate installation of such equipment as soon as practicable, provided that installation shall be accomplished prior to the date of unit testing or the Commercial Operation Date, whichever comes first. The communication protocol for this data circuit(s) shall be specified by the Operating Agent. Instantaneous bi-directional analog real power and reactive power flow information must be telemetered directly to the location(s) specified by the Operating Agent. The Operating Agent shall provide EPE, PNM and TNMP, as applicable, with access to such data upon request and at their expense.

ARTICLE XVII

I NFORMATION R EPORTING

17.1 General. Generator shall provide to the Operating Agent all information, documents, or data, in the specified format, required for the Operating Agent to fulfill its obligations to NERC, WSCC, the RTO (if applicable) or any Governmental Authority requiring system information. Such information, documents, or data shall be supplied within a reasonable time frame designated by the Operating Agent to meet these obligations.

17.2 Compliance Monitoring Reporting. Generator shall provide all information, documents, or data, in the specified format, requested by NERC, WSCC, the RTO (if applicable) or any other entity with jurisdiction requiring system information for purposes of compliance monitoring programs including RMS. Such information, documents, or data shall be provided to the Operating Agent if required by the specific compliance program or to the extent otherwise required by this Agreement. Such information, documents, or data shall be supplied within the time frame designated by such compliance program sponsor to meet these obligations.

17.3 Regulatory Agency Reporting. Generator shall provide to the Operating Agent all information, documents, or data, in the specified format, required by the Operating Agent to fulfill reporting obligations to any Governmental Authority including FERC. Such information, documents, or data shall be supplied within a reasonable time frame designated by the Operating Agent to meet these obligations.

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17.4 Penalties . Generator shall be responsible for reimbursement to the Operating Agent of any economic sanctions or portions thereof, as applicable, or penalties incurred or imposed upon the Operating Agent due solely to Generator’s failure to provide information, documents, or data in the specified format within the time frame specified by the Operating Agent, or the compliance monitoring program, except to the extent that Generator’s failure is due solely to the Operating Agent’s or any of its Agents’ negligence or willful misconduct.

ARTICLE XVIII

D OCUMENTATION

18.1 General . Each Party shall provide the other Parties with appropriate documentation, consistent with Good Utility Practice, in the form of written test records, operation and maintenance procedures, drawings, material lists, or descriptions whenever a Party makes a change, alteration, or modification to its property, equipment, or facilities that could reasonably be expected to affect the other Parties, or whenever such documentation is necessary to ensure the safe and reliable operation of the Utilities’ Transmission Systems, the SWNMT, the Facility, or the Interconnected Facilities, pursuant to Good Utility Practice or required by the Operating Committee.

18.2 Drawings . The Operating Agent shall identify, number, and provide Generator with a duplicate set of current drawings that represent equipment or facilities that shall be used or operated at or near the Interconnection Point, which shall consist of one or more of the following: (a) system one-line drawings that include breaker and switch designations—single page format drawings used for dispatch and operation purposes; (b) one-line drawings—prints used in conceptual design which provide detail on facility and system interconnections; (c) elementary diagrams—drawings which provide a higher level of detail than one-line drawings and identify on a single-line basis current and voltage transformer locations, protection relay types, and meter and control connections; (d) three-line diagrams—drawings which provide the highest level of detail for the facilities in a three-line format with specific current and voltage transformer connections, relay and meter connections; (e) schematic drawings or elementaries—drawings which provide information on apparatus controls, switch developments, etc.; (f) relay and control panel front view and wiring diagrams—drawings which describe physical panel layout, relay, terminal block and device locations, wiring, and other construction details; and (g) other physical drawings—drawings which include information on foundations, equipment layouts, grounding panel construction, site plans, etc.

ARTICLE XIX

F ORCE M AJEURE

19.1 Definition . As used in this Agreement, the term “Force Majeure” means any cause that is beyond the reasonable control of the Party affected which, despite the affected Party’s exercise of Due Diligence to prevent or overcome, prevents the performance by such affected Party of its obligations under this Agreement. Subject to the foregoing, “Force Majeure” shall include sabotage, strikes or other labor difficulties, riots, civil disturbances, acts of God, wars, acts of public enemies, epidemics, drought, earthquake, flood, explosion,

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fire, lightning, landslides, or similar cataclysmic event, breakage or accident to machinery or equipment, order, regulation, or restriction imposed by governmental military or lawfully established civil authorities, the occurrence of an event described in the first sentence of Article 2.4 (provided that the Party asserting Force Majeure based on such occurrence complies with its obligations under Article 2.4), or any other cause, whether of the kind enumerated herein or otherwise. A Force Majeure event does not include : (a) economic hardship of or loss of markets by a Party; (b) the unavailability of transmission or distribution capability, unless the Party claiming Force Majeure has contracted for firm transmission and such unavailability is the result of a “force majeure” event or “uncontrollable force” or a similar term as defined under the applicable transmission tariff; (c) events resulting from, or attributable to, normal wear and tear experienced in power generation, interconnection, and transmission materials and equipment; and (d) events attributable to negligence or willful misconduct, failure to comply with any Applicable Laws and Regulations, any default under this Agreement, or any failure to act in accordance with Good Utility Practice in each case by the Party claiming Force Majeure.

19.2 Performance Excused . If any Party is rendered wholly or partially unable to perform under this Agreement because of a Force Majeure event, such Party shall be excused from such obligations to the extent that the occurrence of the Force Majeure event prevents such Party’s performance and such Party shall not be liable for any resulting damages, provided that: (a) the non-performing Party provides the other Parties with prompt verbal notice of the occurrence of the Force Majeure event, and provides written notice describing in reasonable detail the nature of the Force Majeure event within three (3) Business Days of the Force Majeure event; (b) the suspension of performance shall be of no greater scope and of no longer duration than is reasonably required by the Force Majeure event; (c) the non-performing Party uses Due Diligence to remedy its inability to perform; and (d) as soon as the non-performing Party is able to resume performance of its obligations excused as a result of the occurrence, it gives prompt written notification thereof to the other Parties.

19.3 Labor Issues . No Party shall be required to settle a strike or other labor dispute affecting its operations.

19.4 Payment Not Excused . Nothing in this Article XIX shall excuse any Party from making payments due pursuant to the terms and conditions of this Agreement for the period prior to the occurrence of the Force Majeure event.

ARTICLE XX

I NDEMNIFICATION

20.1 INTERCONNECTION INDEMNITY . GENERATOR SHALL AT ALL TIMES INDEMNIFY AND HOLD HARMLESS THE OPERATING AGENT, THE LUNA SUBSTATION OWNERS, THE UTILITIES AND THE SWNMT PARTICIPANTS FOR, AGAINST AND FROM ANY AND ALL DAMAGES, LOSSES, CLAIMS, INCLUDING CLAIMS AND ACTIONS RELATING TO INJURY TO OR DEATH OF ANY PERSON OR DAMAGE TO OR LOSS OF ANY PROPERTY, DEMANDS, SUITS, RECOVERIES, COSTS AND EXPENSES, COURT COSTS, ATTORNEY FEES, AND ALL OTHER

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OBLIGATIONS BY OR TO THIRD PARTIES, ARISING OUT OF OR RESULTING FROM THE OPERATING AGENT’S PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT ON BEHALF OF GENERATOR, EXCEPT IN CASES OF NEGLIGENCE OR INTENTIONAL WRONGDOING BY THE OPERATING AGENT.

20.2 RECIPROCAL INDEMNITY . EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, EACH PARTY SHALL INDEMNIFY AND HOLD HARMLESS EACH OTHER PARTY, ITS AFFILIATES, AGENTS, SUCCESSORS, REPRESENTATIVES AND PERMITTED ASSIGNS FOR, AGAINST AND FROM ANY CLAIM, LIABILITY, DAMAGE, LOSS OR EXPENSE OF ANY KIND OR NATURE (INCLUDING REASONABLE ATTORNEYS’ FEES), (A) FOR PERSONAL INJURY TO OR DEATH OF ANY PERSON, (B) FOR LOSS OF OR DAMAGE TO PROPERTY OF THIRD PARTIES OR THE REAL PROPERTY OR TANGIBLE PERSONAL PROPERTY OF SUCH OTHER PARTY, OR (C) ARISING OUT OF OR RESULTING FROM PERFORMANCE OF OBLIGATIONS UNDER THIS AGREEMENT, IN EACH INSTANCE TO THE EXTENT DETERMINED TO BE ATTRIBUTABLE TO THE NEGLIGENCE, GROSS NEGLIGENCE, WILLFUL MISCONDUCT, OR STRICT LIABILITY IN TORT OF OR BREACH OF THIS AGREEMENT BY THE INDEMNITOR OR ITS AFFILIATES, AGENTS, SUCCESSORS OR PERMITTED ASSIGNS.

20.3 DAMAGE DISCLAIMER . THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT SATISFY THE ESSENTIAL PURPOSES HEREOF. FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED, SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY. THE OBLIGOR’S LIABILITY SHALL BE LIMITED AS SET FORTH IN SUCH PROVISION AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. IN NO EVENT SHALL ANY PARTY BE LIABLE FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING LOSS OF PROFIT OR REVENUE, LOSS OF THE USE OF EQUIPMENT, COST OF CAPITAL, COST OF TEMPORARY EQUIPMENT OR SERVICES, WHETHER BASED ON BREACH OF CONTRACT, NEGLIGENCE, GROSS NEGLIGENCE, WILLFUL MISCONDUCT, STRICT LIABILITY OR OTHER CAUSES OF ACTION. ALL PAYMENTS DUE FOR SERVICES UNDER THIS AGREEMENT AND ALL COSTS, EXPENSES, AND PAYMENTS DUE UNDER ARTICLE 5.4.6 SHALL BE DEEMED TO CONSTITUTE DIRECT (NOT SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL) DAMAGES FOR PURPOSES OF THIS ARTICLE 20.3. THE PROVISIONS AND DISCLAIMERS OF THIS ARTICLE 20.3 SHALL NOT APPLY TO CLAIMS FOR PERSONAL INJURY OR DEATH AND SHALL NOT APPLY TO ARTICLE 11.3.2 AND ARTICLE 22.7 OF THIS AGREEMENT.

20.4 Indemnities Reformed . The indemnities set forth in this Article XX shall be construed to be effective to the maximum extent permitted by Applicable Laws and Regulations. To the extent that any of the indemnities are determined to be unenforceable or void under

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Applicable Laws and Regulations, the indemnities shall be reformed and restated to the extent necessary to render them effective.

20.5 Indemnification Procedures . If any Party intends to seek indemnification under this Article XX from any other Party, the Party seeking indemnification shall give such other Party written notice of such claim within thirty (30) days of the commencement of, or actual knowledge of, such claim. Such notice shall describe the claim in reasonable detail and shall indicate the amount (estimated, if necessary) of the claim that has been or may be sustained by such Party. To the extent that the other Party is actually and materially prejudiced as a result of the failure to provide such notice, the other Party’s liability under the provisions of this Article XX shall be reduced proportionately to such prejudice. The Party being indemnified may, if in its reasonable judgment its interests are adverse to the interests of the indemnifying Party, elect to assume at its own expense and by its own counsel the defense of the claim, in which case the indemnifying Party shall cooperate in good faith at its own expense with the Party being indemnified in such defense. No Party shall settle or compromise any claim without the prior written consent of the Party from which it is seeking indemnification; provided, however, that such consent shall not be unreasonably withheld, delayed or denied.

20.6 Additional Indemnification Provisions . If a court of competent jurisdiction determines that NMSA 1978, § 56-7-1 is applicable to this Agreement, then nothing in this Article 20.6 or any other indemnification provision of this Agreement shall extend to liability, claims, damages, losses, or expenses, including attorney fees, arising out of:

1. The preparation or approval of maps, drawings, opinions, reports, surveys, change orders, designs, or specifications by the indemnitee or the employees or agents of the indemnitee; or

2. The giving of or failure to give directions or instructions by the indemnitee, or the employees or agents of the indemnitee, where such giving or failure to give directions or instructions is the primary cause of bodily injury to persons or damage to property.

20.7 Survival . The indemnification obligations, covenants and disclaimers, under this Article XX shall continue in full force and effect regardless of whether this Agreement has expired or been terminated or cancelled and shall not be limited in any way by any limitation on insurance, on the amount or types of damages, or by any compensation or benefits payable by the Parties under any applicable workers’ compensation acts, disability benefit acts, or other employee acts.

ARTICLE XXI

I NSURANCE

21.1 Generator . Without limiting any obligations or liabilities under this Agreement, Generator shall, at its expense, provide and maintain in effect for the term of this Agreement, insurance against the risks set forth below. All insurance shall include waivers of subrogation in favor of the Luna Substation Owners, SWNMT Participants, Utilities, Operating Agent and Project Manager.

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21.1.1 Workers’ compensation insurance with minimum statutory limits to cover obligations imposed by federal and state statutes applicable to the Generator’s employees and employer’s liability insurance with a minimum limit of one million dollars ($1,000,000) per accident.

21.1.2 Commercial general liability insurance, including contractual liability, broad form property damage, premises operations, and personal injury coverage in the amount of twenty-five million dollars ($25,000,000) per occurrence for bodily injury and property damage. Such insurance shall cover the Luna Substation Owners, the SWNMT Participants, the Utilities (and affiliated companies), the Project Manager and the Operating Agent as additional insureds, and shall have cross liability coverage by way of a separation of insureds clause.

21.2 Owners . Without limiting any obligations or liabilities under this Agreement, the Luna Substation Owners, individually and in their capacity as Utility, SWNMT Participant, Operating Agent and/or Project Manager, shall provide and maintain in effect for the term of this Agreement, insurance against the risks set forth below. All insurance shall include waivers of subrogation in favor of Generator.

21.2.1 Workers’ compensation insurance with minimum statutory limits to cover obligations imposed by federal and state statutes applicable to the employees of Operating Agent and employer’s liability insurance with a minimum limit of one million dollars ($1,000,000) per accident.

21.2.2 Commercial general liability insurance, including contractual liability, broad form property damage, premises operations, and personal injury coverage in the amount of twenty-five million dollars ($25,000,000) per occurrence for bodily injury and property damage. Such insurance shall cover Generator as an additional insured, and shall have cross liability coverage by way of a separation of insureds clause.

21.3 Notice of Cancellation . All policies shall provide for thirty (30) calendar days’ prior written notice of cancellation or material adverse change and ten (10) calendar days’ prior written notice of non-payment of premiums. Copies of any such notice shall be provided to each Party and the Operating Agent. Prior to the Operation Date and annually thereafter, each Party shall provide, upon request, evidence of insurance to the Operating Agent and the other Parties.

21.4 Self-Insurance . At its option, each Party may, with adequate credit assurance provided to the other Parties, self-insure all or part of the insurance required in this Article XXI; provided however, that all other provisions of this Article XXI, including waiver of subrogation and additional insured status, shall remain enforceable. A Party’s election to self-insure shall not in any manner result in a reduction of rights and/or benefits otherwise available to the other Parties through formal insurance policies and endorsements as specified in this Article XXI. Each Party shall be responsible for its respective amounts of self-insurance retentions and/or deductibles.

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ARTICLE XXII

D EFAULT

22.1 General . A Party shall be deemed to have breached this Agreement upon the occurrence of any of the events specified in Article 22.2. A Party shall be deemed to be in default of its obligations under this Agreement upon its failure to cure such breach in accordance with the procedures set forth in this Article XXII.

22.2 Events Constituting Breach . The following events shall constitute events of breach by a Party (“Breaching Party”) under this Agreement:

(a) the failure by the Breaching Party to make any payment as required under the terms of this Agreement;

(b) the failure by the Breaching Party to comply with any material term or condition of this Agreement, including any material breach of a representation, warranty, or covenant of this Agreement;

(c) the Breaching Party (or any entity guaranteeing the obligations of such Breaching Party): (i) files or consents by answer or otherwise to a filing against it of any petition or case seeking relief under any federal, state, or foreign bankruptcy, insolvency, or similar law (collectively, “Bankruptcy Laws”); (ii) makes a general assignment for the benefit of a creditor(s); (iii) applies for or consents to the appointment of a custodian, receiver, trustee, conservator, or other officer with similar powers over it or over any substantial part of its property (“Custodian”); (iv) takes corporate action for the purpose of any of the events described in Article 22.2(c)(i)-(iii), above; (v) is dissolved; (vi) by decree of a court of competent jurisdiction, is adjudicated insolvent; or (vii) is unable to provide adequate assurances to the other Parties of the Breaching Party’s continued ability to perform;

(d) a Governmental Authority enters or issues an order or a decree with respect to the Breaching Party: (i) appointing a Custodian; (ii) constituting an order for relief under, or approving a petition or case for relief or reorganization or any other petition or case to take advantage of, any Bankruptcy Laws; or (iii) ordering its dissolution, winding-up, or liquidation;

(e) the assignment of this Agreement by the Breaching Party in a manner inconsistent with the terms and conditions of this Agreement;

(f) the failure of the Breaching Party to provide access rights, or the Breaching Party’s attempt to revoke or terminate such access rights, as provided under this Agreement; and

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(g) the failure by the Breaching Party to provide information or data to one of the other Parties (“Non-Breaching Parties”) as required under this Agreement, provided that the Non-Breaching Party seeking such information or data requires such information or data to satisfy its obligations under this Agreement.

22.3 Notice by Breaching Party . In the event of a breach under Article 22.2(c) or Article 22.2(d), the Breaching Party shall provide the Non-Breaching Parities notice of the event of breach within three (3) Business Days of the occurrence of such event of breach. Such notice shall be in writing and set forth in reasonable detail the nature of the event of breach.

22.4 Cure and Default . Upon obtaining knowledge of an event of breach under Article XXII, a Non-Breaching Party shall give written notice to the Breaching Party and the other Parties, describing, in reasonable detail, to the extent known and applicable, the actions necessary to cure the event of breach. Upon receiving such notice, the Breaching Party shall have thirty (30) days to cure such breach. If the breach cannot be cured within thirty (30) days, the Breaching Party shall commence in good faith all actions that are reasonable and appropriate to cure such breach within such thirty (30) day period, and thereafter shall pursue such action to completion. In the event that the Breaching Party (a) fails to cure such breach or fails to take all actions that are reasonable and appropriate to cure such breach within thirty (30) days of receiving the notice from the Non-Breaching Party or (b) having commenced cure within such thirty (30) day period, fails to complete cure within one hundred eighty (180) days of receiving the notice from the Non-Breaching Party, the Breaching Party shall be in default of this Agreement.

22.5 Continued Operations . In the event of a breach or a default by a Party, but prior to termination of this Agreement, the Parties shall continue to operate and maintain such power systems, protective devices, metering equipment, transformers, communications equipment, building facilities, software, documentation, structural components, and other facilities, equipment, and appurtenances that are reasonably necessary to operate and maintain the Luna Substation, the SWNMT, the Utilities’ Transmission Systems and the Facility in a safe and reliable manner.

22.6 Upon Default . Upon default, a non-defaulting Party may: (a) commence an action to require the Party in default to remedy such default and specifically perform its obligations under this Agreement; (b) pursue other rights and remedies as it may have in law or equity (subject to the limitations set forth in Article XX); and/or (c) terminate this Agreement pursuant to Article 23.2. Notwithstanding the foregoing, the Luna Substation Owners or the Utilities may not terminate this Agreement upon a default by Generator provided that (x) the Luna Substation Owners or Utilities, as the case may be, can be made whole by monetary damages, (y) Generator agrees to compensate the Luna Substation Owners and/or the Utilities, as the case may be, for damages suffered by them as a result of such default (subject to the limitations set forth in Article XX) and (z) such default does not pose a threat to the safety or reliability of the Luna Substation, the SWNMT, or the Utilities’ Transmission Systems.

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22.7 Generator’s Default in Payment for Equipment . If Generator is in default of its obligation to reimburse or otherwise pay the Project Manager, Luna Substation Owners or the applicable Utility, as the case may be, for the cost of all or any part of the Luna Interconnection Facilities and the Protective Equipment (the portion of such equipment for which Generator is in default of payment is herewith referred to as “Default Equipment”), then Generator shall pay the Project Manager, Luna Substation Owners or the applicable Utility, as the case may be, the sum of (a) the costs incurred by or on behalf of the Luna Substation Owners for the acquisition, installation and maintenance of such Default Equipment (including appropriate carrying charges on such Default Equipment calculated from the date of acquisition), (b) the costs incurred by or on behalf of the Luna Substation Owners for labor with respect to the Default Equipment, and (c) interest at the Interest Rate on the amounts specified in subparts (a) and (b) above calculated from the date of breach. If Generator is in default of its obligation to reimburse or otherwise pay any of the Utilities for the cost of all or any part of the Interconnection System Upgrades on such Utility’s Transmission System (the portion of such upgrade for which Generator is in default of payment is herewith referred to as “Default Upgrade”), then Generator shall pay such Utility the sum of (x) the costs incurred by or on behalf of such Utility for the acquisition, installation and other related costs of such Default Upgrade (including appropriate carrying charges on such Default Upgrade calculated from the date of acquisition), (y) the costs incurred by or on behalf of such Utility for labor with respect to the Default Upgrade, and (z) interest at the Interest Rate on the amounts specified in subparts (x) and (y) above calculated from the date of breach.

ARTICLE XXIII

T ERMINATION

23.1 Expiration of Term . Except as otherwise provided in this Article XXIII, this Agreement shall terminate at the conclusion of the term set forth in Article 2.3.

23.2 Termination in the Event of Default . Subject to Articles 23.3 and 22.6, the Operating Agent or Generator may each terminate this Agreement upon the default by the other Party upon: (a) providing written notice of termination to each of the other Parties; and (b) to the extent required, filing a notice of termination with FERC, which notice must be accepted for filing by FERC.

23.3 Survival . Termination of this Agreement shall not relieve any Party of any of its liabilities or obligations arising hereunder prior to the effective date of the termination of this Agreement. In the event of termination, each Party may take whatever judicial or administrative actions are necessary to enforce its rights under this Agreement.

23.4 Disconnection and Disposition of Facilities Upon Termination . Upon termination of this Agreement, unless otherwise ordered or approved by FERC, the Operating Agent may disconnect the Facility from the SWNMT at the Luna Substation in accordance with a plan for disconnection which the Operating Committee approves or upon which the Parties agree. The Luna Substation Owners may dispose of the Luna Interconnection Facilities and the Protective Equipment as the Parties agree, and any of the Utilities may retain or dispose

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of any Interconnection System Upgrades on its transmission system in its sole discretion, provided that in either case Generator shall pay any applicable Termination Costs.

ARTICLE XXIV

C REDITWORTHINESS

For purposes of determining Generator’s ability to meet its obligations hereunder or at any time thereafter during the term of this Agreement, Operating Agent or Project Manager may require Generator to provide and maintain in effect a letter of credit or other form of security to meet Generator’s responsibilities and obligations or an alternate form of security consistent with commercial practices established by the Uniform Commercial Code that protects Operating Agent or Project Manager against non-payment. In any instance where facilities to be built require Operating Agent or Project Manager to incur costs, Operating Agent or Project Manager will not be obligated to incur any costs until Generator provides Operating Agent or Project Manager with a letter of credit or other reasonable form of security acceptable to Operating Agent or Project Manager, consistent with commercial practices as established by Uniform Commercial Code, equivalent to the costs of the new facilities or upgrades.

ARTICLE XXV

R ELATIONSHIP OF THE P ARTIES

25.1 General . EPE (including in its capacities as Project Manager and Operating Agent), PNM, TNMP and Generator are independent contractors. Nothing in this Agreement creates, or is intended to create, an association, trust, partnership or joint venture or impose a trust or partnership duty obligation or liability on or with regard to any of the Parties. Each Party shall be individually responsible for its own covenants, obligations, and liabilities under the terms and conditions of this Agreement.

25.2 Luna Substation Owners . EPE, PNM, TNMP, in their capacity as the Luna Substation Owners, are severally but not jointly liable for the obligations of the Luna Substation Owners under this Agreement. The liability of each of EPE, PNM, and TNMP for any obligation of the Luna Substation Owners under this Agreement is the percentage of such obligation equal to its percentage ownership interest in the Luna Substation. None of EPE, PNM or TNMP shall be liable for the obligation of either of the other two as Luna Substation Owners.

ARTICLE XXVI

R EPRESENTATIONS AND W ARRANTIES

26.1 Representations of EPE . EPE represents and warrants to each of the other Parties as follows:

(a) EPE is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and EPE has the requisite corporate power and authority to carry on its business as now being conducted;

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(b) EPE has the requisite corporate power to execute and deliver this Agreement and to carry out the actions required of it by this Agreement. The execution and delivery of this Agreement and the actions it contemplates have been duly and validly authorized by EPE and no other corporate proceedings on the part of EPE are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by EPE and constitutes a legal, valid, and binding agreement of EPE enforceable against it according to its terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights and by general equitable principles;

(c) EPE is not in violation of any Applicable Laws and Regulations promulgated or judgment entered by any Governmental Authority, which individually or in the aggregate would adversely affect EPE’s entering into or performance of its obligations under this Agreement;

(d) EPE’s entering into and performance of its obligations under this Agreement will not give rise to any default under any agreement to which it is a party; and

(e) EPE shall comply with all Applicable Laws and Regulations of all Governmental Authorities having jurisdiction over EPE or the transactions under this Agreement and with which failure to comply could reasonably be expected to have a material adverse effect on Generator.

26.2 Representations of PNM . PNM represents and warrants to each of the other Parties as follows:

(a) PNM is a corporation duly organized, validly existing, and in good standing under the laws of the State of New Mexico and PNM has the requisite corporate power and authority to carry on its business as now being conducted;

(b) PNM has the requisite corporate power to execute and deliver this Agreement and to carry out the actions required of it by this Agreement. The execution and delivery of this Agreement and the actions it contemplates have been duly and validly authorized by PNM and no other corporate proceedings on the part of PNM are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by PNM and constitutes a legal, valid, and binding agreement of PNM enforceable against it according to its terms and conditions, except as such enforceability

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may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights and by general equitable principles;

(c) PNM is not in violation of any Applicable Laws and Regulations promulgated or judgment entered by any Governmental Authority, which individually or in the aggregate would adversely affect PNM’s entering into or performance of its obligations under this Agreement;

(d) PNM’s entering into and performance of its obligations under this Agreement will not give rise to any default under any agreement to which it is a party; and

(e) PNM shall comply with all Applicable Laws and Regulations of all Governmental Authorities having jurisdiction over PNM or the transactions under this Agreement and with which failure to comply could reasonably be expected to have a material adverse effect on Generator.

26.3 Representations of TNMP . TNMP represents and warrants to each of the other Parties as follows:

(a) TNMP is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and TNMP has the requisite corporate power and authority to carry on its business as now being conducted;

(b) TNMP has the requisite corporate power to execute and deliver this Agreement and to carry out the actions required of it by this Agreement. The execution and delivery of this Agreement and the actions it contemplates have been duly and validly authorized by TNMP and no other corporate proceedings on the part of TNMP are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by TNMP and constitutes a legal, valid, and binding agreement of TNMP enforceable against it according to its terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights and by general equitable principles;

(c) TNMP is not in violation of any Applicable Laws and Regulations promulgated or judgment entered by any Governmental Authority, which individually or in the aggregate would adversely affect

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TNMP’s entering into or performance of its obligations under this Agreement;

(d) TNMP’s entering into and performance of its obligations under this Agreement will not give rise to any default under any agreement to which it is a party; and

(e) TNMP shall comply with all Applicable Laws and Regulations of all Governmental Authorities having jurisdiction over TNMP or the transactions under this Agreement and with which failure to comply could reasonably be expected to have a material adverse effect on Generator.

26.4 Representations of Generator . Generator represents and warrants to each of the other Parties as follows:

(a) Generator is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware and Generator has the requisite power and authority to carry on its business as now being conducted;

(b) Generator has the requisite power to execute and deliver this Agreement and to carry out the actions required of it by this Agreement. The execution and delivery of this Agreement and the actions it contemplates have been duly and validly authorized by corporate officer of Generator and no other proceedings on the part of Generator are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Generator and constitutes a legal, valid, and binding agreement of Generator enforceable against it according to its terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights and by general equitable principles;

(c) Generator is not in violation of any Applicable Laws and Regulations promulgated or judgment entered by any Governmental Authority, which individually or in the aggregate would adversely affect Generator’s entering into or performance of its obligations under this Agreement;

(d) Generator’s entering into and performance of its obligations under this Agreement will not give rise to any default under any agreement to which it is a party; and

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(e) Generator shall comply with all Applicable Laws and Regulations of all Governmental Authorities having jurisdiction over Generator or the transactions under this Agreement and with which failure to comply could reasonably be expected to have a material adverse effect on EPE.

26.5 Representations of Each Party . The representations and warranties set forth in Articles 26.1 through 26.4 shall continue in full force and effect for the term of this Agreement.

ARTICLE XXVII

A SSIGNMENT

27.1 General . This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned by any Party, including by operation of law, without the prior written consent of any of the other Parties, such consent not to be unreasonably withheld or delayed; provided, however, that such prior consent shall not be required (a) for an assignment to an Affiliate or (b) for security for a financing party. Any assignment of this Agreement in violation of this Article XXVII shall be, at the option of any of the non-assigning Parties, void. The assignee shall expressly assume all of the assignor’s obligations under this Agreement.

27.2 EPE . Notwithstanding Article 27.1, any party with which EPE may consolidate, or into which it may merge, or into which it may convey or transfer substantially all of its electric utility assets or part of the EPE Transmission System that includes EPE’s portion of the Luna Interconnection Facilities and Interconnection System Upgrades, or its interest in the Luna Substation and/or the SWNMT, shall automatically and without the consent or approval of Generator or any of the other Parties succeed to all of EPE’s rights, interests, duties and obligations under this Agreement.

27.3 PNM . Notwithstanding Article 27.1, any party with which PNM may consolidate, or into which it may merge, or into which it may convey or transfer substantially all of its electric utility assets or part of the PNM Transmission System that includes PNM’s portion of the Luna Interconnection Facilities and Interconnection System Upgrades, or its interest in the Luna Substation and/or the SWNMT, shall automatically and without the consent or approval of Generator or any of the other Parties succeed to all of PNM’s rights, interests, duties and obligations under this Agreement.

27.4 TNMP . Notwithstanding Article 27.1, any party with which TNMP may consolidate, or into which it may merge, or into which it may convey or transfer substantially all of its electric utility assets or part of the TNMP Transmission System that includes TNMP’s portion of the Luna Interconnection Facilities and Interconnection System Upgrades, or its interest in the Luna Substation and/or the SWNMT, shall automatically and without the consent or approval of Generator or any of the other Parties succeed to all of TNMP’s rights, interests, duties and obligations under this Agreement.

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27.5 Generator . Notwithstanding Article 27.1, any party with which Generator may consolidate, or into which it may merge, or into which it may convey or transfer substantially all of its electric utility assets, shall automatically and without the consent or approval of Operating Agent or any of the other Parties succeed to all of Generator’s rights, interests, duties and obligations under this Agreement.

27.6 No Relief in Event of Assignment . No assignment shall relieve the assigning Party of its obligations under this Agreement in the event that the assignee fails to perform under the terms and conditions of this Agreement, unless and until the assignee agrees in writing to assume the obligations and duties of the assigning Party and the non-assigning Parties reasonably determine that the assignee is no less technically and financially capable of performing its obligations under the Agreement than the assigning Party.

ARTICLE XXVIII

C ONFIDENTIALITY

28.1 General . During the term of this Agreement and for a period of 12 months after the expiration or termination of this Agreement, except as otherwise provided in this Article XXVIII, each Party shall hold in confidence and shall not disclose any Confidential Information to any Person. A Party may disclose Confidential Information received from one of the other Parties to the receiving Party’s auditors and attorneys, Persons providing financing to the receiving Party, and to other third parties as may be necessary for the receiving Party to perform its obligations under this Agreement. To the extent that any disclosure of Confidential Information is necessary, the disclosing Party shall endeavor to preserve the confidentiality of the Confidential Information.

28.2 Scope . Confidential Information shall not include any information that the receiving Party can demonstrate: (a) is generally available to the public other than as a result of a disclosure by the receiving Party; (b) was in the lawful possession of the receiving Party on a non-confidential basis prior to receiving it from any other Party; (c) was supplied to the receiving Party without any restrictions by a third party who, to the knowledge of the receiving Party, was under no obligation to any other Party to keep the information confidential; (d) was independently developed by the receiving Party; (e) is, or becomes, publicly known, through no wrongful act or omission of the receiving Party or breach of this Agreement; or (f) is required, in accordance with Article 28.5, to be disclosed to any Governmental Authority or is otherwise required to be disclosed by law or subpoena, or is necessary in any legal proceeding establishing rights or obligations under this Agreement. Confidential Information is not considered confidential if the Party that designated such information as confidential notifies the other Parties that such information is no longer confidential.

28.3 Rights in Confidential Information . Each Party retains all rights, title, and interest in the Confidential Information that it discloses to the other Parties. The disclosure by a Party to the other Parties of Confidential Information shall not be deemed a waiver by any Party or any other Person or entity of the right to protect the Confidential Information from public disclosure.

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28.4 Standard of Care . Each Party shall use the same standard of care to protect Confidential Information that it receives as it uses to protect its own Confidential Information from disclosure, publication, or dissemination.

28.5 Required Disclosures . If a Governmental Authority requests or requires a Party to disclose Confidential Information, such Party shall provide prompt notice to the Party that provided the Confidential Information of such request or requirement so that such other Party may seek an appropriate protective order or waive compliance with the terms of this Agreement. Notwithstanding the absence of a protective order or waiver, a Party may disclose such Confidential Information which it is legally required to disclose. Each Party shall use Commercially Reasonable Efforts to obtain reliable assurances that confidential treatment will be accorded to Confidential Information required to be disclosed.

28.6 Possession of Confidential Information at Termination of Agreement . Upon the termination or expiration of this Agreement and within ten (10) days of receipt of a written request from one of the other Parties, a Party shall destroy, erase, delete, or return to such other Party any and all written or electronic Confidential Information received from such other Party and shall retain no written or electronic copies of any Confidential Information.

28.7 Remedies Regarding Confidentiality . The Parties agree that monetary damages by themselves may be inadequate to compensate a Party for another Party’s breach of its obligations under Article XXVIII. Each Party accordingly agrees that the other Parties may seek equitable relief, by way of injunction or otherwise, if it breaches or threatens to breach its obligations under Article XXVIII.

ARTICLE XXIX

D ISPUTE R ESOLUTION

29.1 Dispute Resolution by Operating Committee . To the extent that a dispute arises under this Agreement, the Party raising such dispute shall provide written notice of such dispute to the other Parties. Within ten (10) Business Days (or such other period as the Parties may agree upon) of the receipt of the notice by such Party, the Operating Committee shall convene in an attempt to resolve the dispute. If the Operating Committee is able to resolve the dispute, such resolution shall be reported in writing and shall be binding on the Parties.

29.2 Dispute Resolution by Senior Management . If the Operating Committee is unable to resolve the dispute within thirty (30) Business Days of the receipt of such notice, then the Parties shall refer the dispute to their respective senior management for resolution. If the senior management is able to resolve the dispute, such resolution shall be reported in writing and shall be binding on the Parties. In the event the senior management is unable to resolve the dispute within thirty (30) Business Days (or such other period as the Parties may agree upon) of referral, the Parties may elect to proceed to arbitration pursuant to Article 29.3 or if the Parties do not agree to proceed to arbitration within thirty (30) Business Days of the referral of the dispute to senior management, then each Party shall have the right to pursue any other rights or remedies that may be available at law or equity, subject to Articles 20.3 and 22.7.

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29.3 Arbitration.

29.3.1 Commencement of Arbitration Proceeding. If the Operating Committee and the senior management are unable to resolve a dispute arising under this Agreement pursuant to Articles 29.1 and 29.2, the Parties, by mutual written agreement, may submit the dispute to arbitration. Each Party shall submit a written statement detailing the nature of the dispute, designating the issue(s) to be arbitrated, identifying the provisions of this Agreement under which the dispute arose, and setting forth such Party’s proposed resolution of such dispute. The arbitration shall be conducted in accordance with the provisions of this Article XXIX, unless otherwise agreed in writing by the Parties.

29.3.2 Appointment of Arbitrator. Within ten (10) days of the date of the Parties’ written agreement to submit a dispute to arbitration, a representative of each Party shall meet for the purpose of selecting an arbitrator. If the Parties’ representatives are unable to agree on an arbitrator within twenty (20) days of the date of the Parties’ written agreement to submit the dispute to arbitration, then an arbitrator shall be selected in accordance with the procedures of the American Arbitration Association (“AAA”). Whether the arbitrator is selected by the Parties’ representatives or in accordance with the procedures of the AAA, the arbitrator shall, to the extent reasonably practicable or unless otherwise agreed by the Parties, have the qualifications and experience in the occupation, profession, or discipline relevant to the subject matter of the dispute.

29.3.3 Arbitration Proceedings. Any arbitration proceeding shall be conducted in accordance with the commercial arbitration rules of the AAA in effect on the date of the notice, except as may be specifically modified in this Agreement.

29.3.4 Authority of Arbitrator. The arbitrator shall be bound by the provisions of this Agreement where applicable, and shall have no authority to modify any terms and conditions of this Agreement in any manner. The arbitrator shall render a decision, and may determine that monetary damages are due to a Party or may issue a directive that a Party take certain actions or refrain from taking certain actions, but shall not be authorized to order any other form of relief; provided, however, that nothing in this Article 29.3 shall preclude the arbitrator from rendering a decision which adopts the resolution of the dispute proposed by a Party. Unless otherwise agreed to by the Parties, the arbitrator shall render a decision within forty-five (45) days of the conclusion of the arbitration hearing, and shall notify the Parties in writing of such decision and the reasons supporting such decision. The decision of the arbitrator shall be final and binding upon the Parties and may be enforced or challenged in any court of competent jurisdiction. The arbitrator shall have no authority to award any damages inconsistent with the terms of this Agreement. The decision must also be filed at FERC if it affects FERC-jurisdictional rates, terms, and conditions of service or facilities.

B-60

29.3.5 Expenses and Costs. The fees and expenses of the arbitrator shall be shared equally by the Parties, unless the arbitrator specifies a different allocation. All other expenses and costs of the arbitration proceeding shall be the responsibility of the Party incurring such expenses and costs.

29.3.6 Location of Arbitration Proceedings. Unless otherwise agreed by the Parties, any arbitration proceedings shall be conducted in El Paso, Texas.

29.3.7 Confidentiality. The existence, contents, or results of any arbitration proceeding under this Article XXIX may not be disclosed without the prior written consent of all Parties; provided, however, that any Party may make disclosures as may be required to fulfill regulatory obligations to any agencies having jurisdiction, seek or obtain from a court of competent jurisdiction judgment on, confirmation, or vacation of an arbitration award, and may inform its lenders, Affiliates, auditors, attorneys, and insurers, and any Person providing it with financing, as necessary, under pledge of confidentiality and can consult with expert consultants as required in connection with an arbitration proceeding under pledge of confidentiality. If a Party seeks preliminary injunctive relief from any court to preserve the status quo or avoid irreparable harm pending arbitration, the Parties shall keep the court proceedings confidential to the maximum extent permitted by Applicable Laws and Regulations.

29.3.8 Preliminary Injunctive Relief. Nothing in this Article XXIX shall be construed to preclude the ability of any Party to resort to a court of competent jurisdiction solely for the purposes of securing a temporary or preliminary injunction to preserve the status quo or avoid irreparable harm pending arbitration. This Article 29.3.8 shall not be construed as a waiver of arbitration under Article 29.3.

29.4 FERC Jurisdiction Over Certain Disputes. Nothing in this Agreement shall be construed to preclude any Party from filing an application, petition or complaint with FERC with respect to any claim over which FERC has jurisdiction. In such case, the other Parties may request that FERC decline to adjudicate such application, petition or complaint. If FERC declines to adjudicate such application, petition or complaint with respect to all or part of a claim, the portion of the claim not so accepted by FERC may be resolved through arbitration, as provided in this Article XXIX. To the extent that FERC asserts or accepts jurisdiction over all or part of a claim, the decisions, findings of fact, or orders of FERC shall be final and binding, subject to judicial review under the Federal Power Act, and any arbitration proceedings that may have commenced prior to the assertion or acceptance of jurisdiction by FERC shall be stayed, pending the outcome of the FERC proceedings. The arbitrator shall have no authority to modify, and shall be conclusively bound by, any decisions, findings of fact, or orders of FERC; provided, however, that to the extent that any decisions, findings of fact, or orders of FERC do not provide a final or complete remedy to the Party seeking relief, such Party may proceed to arbitration under this Article XXIX to secure such a remedy, subject to any FERC decisions, findings, or orders.

B-61

29.5 Continued Performance. The Parties shall continue to perform their respective obligations under this Agreement during the pendency of any dispute including a dispute regarding the effectiveness of the purported termination of this Agreement.

ARTICLE XXX

M ISCELLANEOUS

30.1 Partial Invalidity. Wherever possible, each provision of this Agreement shall be interpreted in a manner as to be effective and valid under Applicable Laws and Regulations, but if any provision contained herein shall be found to be invalid, illegal, or unenforceable in any respect and for any reason, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality, or unenforceability without invalidating the remainder of the provision or any provision of this Agreement, unless such a construction would be unreasonable. If such a construction would be unreasonable or would deprive a Party of a material benefit under this Agreement, the Parties shall seek to amend this Agreement to remove the invalid portion and otherwise provide the benefit, unless prohibited by Applicable Laws and Regulations.

30.2 Successors Included. Reference to any individual, corporation, or other entity shall be deemed a reference to such individual, corporation, or other entity together with its successors and permitted assigns from time to time.

30.3 Applicable Laws and Regulations. This Agreement is made subject to all existing and future Applicable Laws and Regulations and to all existing and future duly promulgated orders or other duly authorized actions of Governmental Authorities having jurisdiction over the matters set forth in this Agreement.

30.4 Choice of Law and Jurisdiction. The interpretation and performance of this Agreement shall be in accordance with the laws of the State of New Mexico, without regard to choice of law or conflict of laws principles that would require the application of the laws of a different jurisdiction.

30.5 Entire Agreement. This Agreement supersedes all previous representations, understandings, negotiations, and agreements either written or oral between the Parties or their representatives with respect to the subject matter hereof, and constitutes the entire agreement of the Parties with respect to the subject matter hereof. In the event of any inconsistency between the main body of this Agreement and the Appendices attached hereto and made a part hereof, the main body of this Agreement shall control.

30.6 Counterparts to this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument.

30.7 Amendments. No amendments or changes to this Agreement shall be binding unless made in writing and duly executed by each of the Parties and accepted or approved by the FERC. Notwithstanding any provisions in this Agreement to the contrary, Generator may exercise its rights under Sections 205 and 206 of the Federal Power Act and pursuant to FERC’s

B-62

rules and regulations promulgated thereunder with respect to any rate, term, condition, charge, classification of service, rule or regulation for any services provided under this Agreement over which FERC has jurisdiction. Notwithstanding any provisions in this Agreement to the contrary, EPE, PNM or TNMP may unilaterally make application to the FERC under Section 205 of the Federal Power Act and pursuant to FERC’s rules and regulations promulgated thereunder for a change in any rate, term, condition, charge, classification of service, rule or regulation under or related to this Agreement.

30.8 Amendments Included. Reference to, and the definition of, any document (including this Agreement) shall be deemed a reference to such document as it may be amended, amended and restated, supplemented, or modified from time to time.

30.9 Notices. Unless otherwise provided in this Agreement, any notice, consent, or other communication required to be made under this Agreement shall be in writing and shall be delivered in person, by certified mail (postage prepaid, return receipt requested), or by nationally recognized overnight courier (charges prepaid), in each case properly addressed to such Party as shown below, or sent by facsimile transmission to the facsimile number indicated below. Any Party may from time to time change its address for the purposes of notices, consents, or other communications to that Party by a similar notice specifying a new address, but no such change shall become effective until it is actually received by the Party sought to be charged with its contents. All notices, consents, or other communications required or permitted under this Agreement that are addressed as provided in this Article 30.9 shall be deemed to have been given (a) upon delivery if delivered in person, by overnight courier or certified mail or (b) upon automatically generated confirmation if given by facsimile.

Generator:

Senior Vice President, Asset Management

Duke Energy Luna, LLC

c/o Duke Energy North America, LLC

5400 Westheimer Court

Houston, Texas 77056

Tel: 713-627-4633

Fax: 713-627-4655

El Paso Electric Company:

Assistant Vice President, System Operations

El Paso Electric Company

123 W. Mills

El Paso, Texas 79901

Tel: 915-543-5888

Fax: 915-521-4763

Public Service Company of New Mexico:

B-63

Public Service Company of New Mexico

414 Silver Avenue S.W.

Albuquerque, New Mexico 87102

Attention: Director, Transmission Development and Contracts

Tel: 505-241-4570

Transmission Services Trading: 505-241-2032

Fax: 505-241-4363

Texas-New Mexico Power Company:

Robert Castillo

Vice President, New Mexico Region

Texas-New Mexico Power Company

3815 N. Swan Street

Silver City, New Mexico 88061

Tel: 505-538-3768

Fax: 505-538-2267

Project Manager:

Director, Transmission, Substation & Special Projects

El Paso Electric Company

123 W. Mills

El Paso, Texas 79901

Tel: 915-543-5727

Fax: 915-521-4712

Operating Agent:

Assistant Vice President, System Operations

El Paso Electric Company

123 W. Mills

El Paso, Texas 79901

Tel: 915-543-5888

Fax: 915-521-4763

30.10 Waivers. The failure of any Party to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision. Nor shall such Party’s failure to enforce a provision affect in any way the validity of this Agreement or any portion thereof or the right of a Party thereafter to enforce each and every provision of this Agreement. To be effective, a waiver under this Agreement must be in writing and specifically state that it is a waiver. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.

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30.11 No Third Party Beneficiaries. Except as provided in Article IX with respect to the WSCC for express purposes set forth in Article IX, nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any Persons other than the Parties and their respective permitted successors and assigns.

30.12 Further Assurances. If any Party determines in its reasonable discretion that any further instruments, assurances, or other things are necessary or desirable to carry out the terms of this Agreement, the other Parties shall execute and deliver all such instruments or assurances, and do all things reasonably necessary or desirable to carry out the terms of this Agreement.

Without limiting the generality of the foregoing, the Luna Substation Owners agree, at Generator’s expense and upon Generator’s request, to prepare and/or provide such information in connection with this Agreement and/or the services to be provided under this Agreement as may be reasonably required by any potential lender to Generator.

30.13 Headings. The headings contained in this Agreement are solely for the convenience of the Parties and shall not be used or relied upon in any manner in the construction or interpretation of this Agreement.

30.14 Articles. Unless otherwise specified, all references in this Agreement to numbered articles shall be to numbered articles in this Agreement.

30.15 Number, Gender, and Inclusion. Defined terms in the singular shall include the plural and vice versa, and the masculine, feminine, or neuter gender shall include all genders. Whenever the words “include,” “includes,” or “including” are used in this Agreement, they are not limiting, and have the meaning as if followed by the words “without limitation.”

30.16 Good Utility Practice. The Parties shall discharge any and all obligations under this Agreement in accordance with Good Utility Practice.

30.17 Succession Upon Membership in an RTO. If the Operating Agent joins an RTO, the terms and conditions provided in this Agreement for interconnection with the SWNMT at the Luna Substation shall be superseded by any pertinent interconnection and operational provisions required by the RTO, and the Parties shall amend this Agreement as necessary to conform with RTO requirements. Additionally, if a change in the Operating Agent occurs under an RTO, the Parties shall amend this Agreement to reflect such change.

30.18 Notification of Change of Operating Agent. The Operating Agent will provide the other Parties with advance written notice of a change in the identity of the Operating Agent.

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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date set forth at the beginning of this Agreement.

D UKE E NERGY L UNA , LLC

By:
Title

E L P ASO E LECTRIC C OMPANY (including in its capacity as project manager and operating agent)

By:
Title

P UBLIC S ERVICE C OMPANY OF N EW M EXICO

By:
Title

T EXAS - NEW M EXICO P OWER C OMPANY

By:
Title

B-66

EXHIBIT A

APPENDIX A

EQUIPMENT TO BE INSTALLED BY THE GENERATOR

Generator’s Facility Switchyard

•

18kV isophase bus to generator step-up transformers

•

two, 18kV/4.16kV auxiliary transformers

•

three, 18kV/345kV generator step-up transformers (GSU’s)

•

nine, GSU lightning arresters

•

three, 345kV circuit breakers

•

three, 345kV disconnect switches

•

345kV rigid and flexible bus

•

bus and equipment support structures, hardware, and fittings

•

control house

•

interconnect bus line surge arresters

•

three CCVT’s

Interconnection Bus Line (approximate length 1700 feet)

•

conductor support structures, hardware, and fittings

•

conductor and communication cables

Protective Equipment in Generator’s Facility Switchyard

•

bus differential relaying

•

345kv circuit breakers

•

GSU and interconnection bus line surge arresters

•

GSU differential relaying

•

bus CCVT’s and breaker bushing CT’s for relaying information

Synchronization Equipment in Generator’s Facility Switchyard

•

two, 18kV gas turbine generator breakers

•

one, 345kV steam turbine high-side breaker

Communication Equipment in Generator’s Facility Switchyard

•

fiber link between plant control system and switchyard control house

•

two independent communication links between facility switchyard and Luna Substation control house

•

RTU in switchyard control house

Metering Equipment in Generator’s Facility Switchyard

There will be no metering equipment in the Generator Facility switchyard

A-1

APPENDIX B

EQUIPMENT AND COST OF EQUIPMENT TO BE INSTALLED BY THE

PROJECT MANAGER OR UTILITIES

Project Manager’s Equipment List—Phase I of Luna Substation Upgrades

Luna Substation Bus Extension

•

Four, 345kV disconnect switches

•

One, 345kV circuit breaker with pre-insertion resistors and separate CT’s

•

One, dead-end structure for termination of Interconnection Bus Line

•

Rigid and flexible bus

•

Bus and equipment support structures, hardware, and fittings

•

Ground Grid Extension

Protective Equipment in Luna Substation

•

Control House Extension

•

One, 345kV circuit breaker

•

Three surge arrestors at termination of Interconnection Bus Line

•

Relays, Racks and Control Cable

•

Communication Racks and equipment

Metering Equipment

•

Metering Class

Three, Current Transformers

Three, Capacitor Voltage Transformers

•

Revenue Meter

Project Manager’s Equipment List—Phase II of Luna Substation Upgrades

Luna Substation Bus Extension to Breaker-and-a-half Scheme

•

Site Work

•

Fence Addition

•

Ground Grid Extension

•

Two, 345kV circuit breakers

•

Four, 345kV disconnect switches

•

Rigid and flexible bus

•

Bus and equipment support structures, hardware, and fittings

•

Site Work

•

Fence Addition

•

Ground Grid Extension

•

Two, 345kV circuit breakers

•

Four, 345kV disconnect switches

•

Rigid and flexible bus

•

Bus and equipment support structures, hardware, and fittings

A-2

Utilities (PNM and TNMP) Equipment List—Interconnection System Upgrades

•

Luna-Mimbres 115kV Transmission Line and Mimbres Substation (PNM):

— reconductor Luna-Mimbres Line with 954 MCM ACSR

— replace switches in Mimbres Substation

•

Mimbres-Picacho 115kV Transmission Line (PNM and TNMP):

— raise conductor via structure replacements and modifications

— replace switches in Picacho Substation

A-3

APPENDIX B

EQUIPMENT AND COST OF EQUIPMENT TO BE INSTALLED BY THE

PROJECT MANAGER OR UTILITIES

Project Manager’s Cost Breakdown

Luna Substation Bus Extension—Phase I (EPEC)

•

Total Estimated Cost = $650,000

Luna Substation Expansion—Phase II (EPEC)

•

Total Estimated Cost = $850,000

Utilities Cost Breakdown and Estimated Cash Flow

Luna-Mimbres 115kV Transmission Line Upgrade (PNM) and Mimbres-Picacho 115kV

Transmission Line Upgrade (50% PNM and 50% TNMP Ownership)

•

Estimated Luna-Mimbres Line Upgrade Cost = $259,800

(this includes estimated upgrades at Mimbres Substation)

•

Estimated Mimbres-Picacho Line Upgrade Cost = $1,687,300

•

Total Estimated Cost, both line upgrades = $1,947,100

•

Estimated Combined Cash Flow

Month
January, 2002	$	21,610
February, 2002	$	21,610
March, 2002	$	21,610
April, 2002	$	21,610
May, 2002	$	23,720
June, 2002	$	65,580
July, 2002	$	20,510
August, 2002	$	71,150
September, 2002	$	387,970
October, 2002	$	548,540
November, 2002	$	253,710
December, 2002	$	221,000
January, 2003	$	244,210
February, 2003	$	24,270

Total	$	1,947,100

A-4

APPENDIX C

PROJECT MANAGER’S AND GENERATOR’S CONSTRUCTION AND

TESTING SCHEDULES

Generator’s Schedule

Overall Schedule

Backfeed power via 345kV

11/15/02

Export Power Testing

2/1/03

Commercial Operation

6/1/03

Facility Switchyard Schedule

Underground Construction

6/02 through 8/02

Above ground Construction

8/02 through 10/02

Install Circuit Breakers

8/02 through 9/02

Install Relay and Protection Equip.

8/02 through 10/02

Testing and Checkout

10/1/02 through 10/14/02

Energize and Backfeed

10/14/02 through 10/15/02

Interconnection Bus Line Schedule—to Phase I Connection Point

Underground Construction

6/02 through 8/02

Above ground Construction

8/02 through 10/02

Energize and Backfeed

10/14/02 through 11/15/02

Interconnection Bus Line Schedule—to Phase II Connection Point

Completed on or before

3/1/04

Project Manager’s Schedule

Phase I Connection Schedule

Engineering

01/02 through 8/02

Construction

8/02 through 10/02

Install Circuit Breakers

8/02 through 10/02

Install Relay and Protection Equip.

8/02 through 10/02

Testing and Checkout

10/1/02 through 11/14/02

A-5

Phase II Connection Schedule

Completed on or before 3/1/04

Utilities’ Schedule

Re-Conductor Luna-Mimbres Line and Upgrade Mimbres Substation 9/02 through 10/02

Upgrade Mimbres-Picacho Line and Picacho Substation 9/02 through 2/03

A-6

APPENDIX D

INTERCONNECTION DRAWINGS, ONE-LINES, AND SCHEMATICS

A-7

Exhibit 10.60

$100,000,000

CREDIT AGREEMENT

dated as of

February 12, 1996,

as amended and restated

as of February 8, 1999

and January 28, 2002

among

EL PASO ELECTRIC COMPANY

JPMORGAN CHASE BANK

not in its individual capacity,

but solely in its capacity as trustee of the

Rio Grande Resources Trust II

THE LENDERS PARTY HERETO

and

JPMORGAN CHASE BANK

as Administrative Agent,

Collateral Agent

and Issuing Bank

J.P. MORGAN SECURITIES INC.

as Book Manager and Lead Arranger

BARCLAYS BANK

as Documentation Agent

UNION BANK OF CALIFORNIA

as Syndication Agent

TABLE OF CONTENTS

		Page

ARTICLE I
Definitions
S ECTION 1.01.	Defined Terms	1
S ECTION 1.02.	Terms Generally	16
ARTICLE II
The Credits
S ECTION 2.01.	Commitments	17
S ECTION 2.02.	Loans	17
S ECTION 2.03.	Borrowing Procedure	18
S ECTION 2.04.	Evidence of Debt; Repayment of Loans	19
S ECTION 2.05.	Fees	19
S ECTION 2.06.	Interest on Loans	20
S ECTION 2.07.	Default Interest	20
S ECTION 2.08.	Alternate Rate of Interest	20
S ECTION 2.09.	Termination and Reduction of Commitments	21
S ECTION 2.10.	Conversion and Continuation of Borrowings	21
S ECTION 2.11.	Optional Prepayment	22
S ECTION 2.12.	Reserve Requirements; Change in Circumstances	22
S ECTION 2.13.	Change in Legality	24
S ECTION 2.14.	Indemnity	24
S ECTION 2.15.	Pro Rata Treatment	25
S ECTION 2.16.	Sharing of Setoffs	25
S ECTION 2.17.	Payments	25
S ECTION 2.18.	Taxes	25
S ECTION 2.19.	Assignment of Commitments Under Certain Circumstances; Duty to Mitigate	27
S ECTION 2.20.	Letters of Credit	28
S ECTION 2.21.	Extension of Maturity Date	31
ARTICLE III
Representations and Warranties
S ECTION 3.01.	Organization; Powers	32
S ECTION 3.02.	Authorization	32
S ECTION 3.03.	Enforceability	32
S ECTION 3.04.	Governmental Approvals	32
S ECTION 3.05.	Financial Statements	33
S ECTION 3.06.	No Material Adverse Change	33
S ECTION 3.07.	Title to Properties; Possession Under Leases	33
S ECTION 3.08.	Subsidiaries	33
S ECTION 3.09.	Litigation; Compliance with Laws	33
S ECTION 3.10.	Agreements	33
S ECTION 3.11.	Federal Reserve Regulations	34
S ECTION 3.12.	Investment Company Act; Public Utility Holding Company Act	34
S ECTION 3.13.	Use of Proceeds	34

		Page
S ECTION 3.14.	Tax Returns	34
S ECTION 3.15.	No Material Misstatements	34
S ECTION 3.16.	Employee Benefit Plans	34
S ECTION 3.17.	Environmental Matters	34
S ECTION 3.18.	Insurance	35
S ECTION 3.19.	Security Documents	35
S ECTION 3.20.	Labor Matters	35
S ECTION 3.21.	Solvency	36
S ECTION 3.22.	Capitalization	36
ARTICLE IV
Conditions of Lending
S ECTION 4.01.	All Credit Events	36
S ECTION 4.02.	Restatement Closing Date	37
ARTICLE V
Affirmative Covenants
S ECTION 5.01.	Existence; Businesses and Properties	39
S ECTION 5.02.	Insurance	39
S ECTION 5.03.	Obligations and Taxes	39
S ECTION 5.04.	Financial Statements, Reports, etc.	39
S ECTION 5.05.	Litigation and Other Notices	40
S ECTION 5.06.	Employee Benefits	40
S ECTION 5.07.	Maintaining Records; Access to Properties and Inspections	41
S ECTION 5.08.	Use of Proceeds	41
S ECTION 5.09.	Compliance with Environmental Laws	41
S ECTION 5.10.	Further Assurances	41
ARTICLE VI
Negative Covenants
S ECTION 6.01.	Indebtedness	42
S ECTION 6.02.	Liens	43
S ECTION 6.03.	Sale and Lease-Back Transactions	44
S ECTION 6.04.	Investments, Loans and Advances	44
S ECTION 6.05.	Mergers, Consolidations and Sales of Assets and Acquisitions	45
S ECTION 6.06.	Transactions with Affiliates	45
S ECTION 6.07.	Businesses of Borrowers and Subsidiaries	45
S ECTION 6.08.	Other Indebtedness and Agreements	45
S ECTION 6.09.	Release of Collateral	46
S ECTION 6.10.	Debt to Capitalization Ratio	46
S ECTION 6.11.	Interest Coverage Ratio	46
S ECTION 6.12.	Consolidated Capital Expenditures	46
S ECTION 6.13.	Fiscal Year	46

		Page
ARTICLE VII
Events of Default		46
ARTICLE VIII
The Administrative Agent and the Collateral Agent		48
ARTICLE IX
Guarantee
S ECTION 9.01.	Guarantee	50
S ECTION 9.02.	Obligations Not Waived	50
S ECTION 9.03.	Security	50
S ECTION 9.04.	Guarantee of Payment	51
S ECTION 9.05.	No Discharge or Diminishment of Guarantee	51
S ECTION 9.06.	Defenses of the Trustee Waived	51
S ECTION 9.07.	Agreement to Pay; Subrogation	51
S ECTION 9.08.	Information	51
S ECTION 9.09.	Termination	52
ARTICLE X
Security
S ECTION 10.01.	First Mortgage Bonds	52
S ECTION 10.02.	Application of Funds	52
S ECTION 10.03.	Rights of Bondholders	53
ARTICLE XI
Miscellaneous
S ECTION 11.01.	Notices	53
S ECTION 11.02.	Survival of Agreement	53
S ECTION 11.03.	Binding Effect	54
S ECTION 11.04.	Successors and Assigns	54
S ECTION 11.05.	Expenses; Indemnity	56
S ECTION 11.06.	Right of Setoff	57
S ECTION 11.07.	Applicable Law	57
S ECTION 11.08.	Waivers; Amendment	57
S ECTION 11.09.	Interest Rate Limitation	58
S ECTION 11.10.	Entire Agreement	58
S ECTION 11.11.	Waiver of Jury Trial	59
S ECTION 11.12.	Severability	59
S ECTION 11.13.	Counterparts	59
S ECTION 11.14.	Headings	59

iii

		Page

S ECTION 11.15.	Jurisdiction; Consent to Service of Process.	59
S ECTION 11.16.	Confidentiality	60
S ECTION 11.17.	Texas Revolving Credit Statute	60
S ECTION 11.18.	No Recourse; Multiple Capacities	60
S ECTION 11.19.	Limited Representations, Warranties and Covenants of Trustee	60

SCHEDULES

Schedule 2.01		Commitments

Schedule 3.04		Governmental Approvals

Schedule 3.09		Litigation and Compliance with Laws

Schedule 3.17		Environmental Matters

Schedule 3.18		Insurance

Schedule 4.02 (a)		Local Regulatory Counsel

Schedule 6.01		Indebtedness

Schedule 6.02		Liens

Schedule 6.04		Certain Investments

EXHIBITS

Exhibit A		Form of Administrative Questionnaire

Exhibit B		Form of Assignment and Acceptance

Exhibit C		Form of Borrowing Request

Exhibit D		Form of Security Agreement

Exhibit E		Form of Pledge Agreement

Exhibit F		Form of Subsidiary Guarantee Agreement

Exhibit G-1		Form of Opinion of Counsel for El Paso

Exhibit G-2		Form of Opinion of Counsel for the Trustee

Exhibit G-3		Form of Opinion of Federal Regulatory Counsel

Exhibit G-4		Form of Opinion of State Regulatory Counsel

Exhibit G-5		Form of Opinion of General Counsel of El Paso

Exhibit H		Form of Indenture Supplement

CREDIT AGREEMENT dated as of February 12, 1996, as amended and restated as of February 8, 1999 and January 28, 2002, among EL PASO ELECTRIC COMPANY, a Texas corporation (“ El Paso ”), JPMORGAN CHASE BANK, a New York banking corporation, not in its individual capacity, but solely in its capacity as trustee of the Rio Grande Resources Trust II (the “ Trustee ”; each of El Paso and the Trustee is referred to individually herein as a “ Borrower ” and collectively as the “ Borrowers ”), the Lenders (as defined in Article I), and JPMORGAN CHASE BANK, as issuing bank (in such capacity, the “ Issuing Bank ”), as administrative agent (in such capacity, the “ Administrative Agent ”) and as collateral agent (in such capacity, the “ Collateral Agent ”) for the Lenders.

The Borrowers, the lenders party thereto, the Issuing Bank, the Collateral Agent and the Administrative Agent are parties to a Credit Agreement dated as of February 12, 1996, as amended and restated as of February 8, 1999 (the “ Existing Credit Agreement ”), pursuant to which (a) the Lenders agreed to extend credit in the form of Loans (such term and each other capitalized term used but not defined herein having the meaning given it in Article I) at any time and from time to time prior to the Existing Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $100,000,000 less the L/C Exposure at such time and (b) the Issuing Bank agreed to issue letters of credit, in an aggregate face amount at any time outstanding not in excess of $70,000,000, to support payment obligations incurred in the ordinary course of business by the Trustee in respect of the purchase of Nuclear Fuel in accordance with the Trust Agreement and the Purchase Contract and to provide backup liquidity for commercial paper issued to finance such purchases.

The Borrowers have requested that the Existing Credit Agreement be amended and restated in the form hereof, and the Lenders and the Issuing Bank are willing to so amend and restate the Existing Credit Agreement.

The proceeds of the Loans are to be used (a) by El Paso solely (i) to repay the principal of, interest on and accrued fees with respect to the outstanding loans to El Paso under the Existing Credit Agreement, (ii) to provide working capital to El Paso, (iii) for general corporate purposes in the ordinary course of El Paso’s business and (iv) to pay related fees and expenses and (b) by the Trustee solely (i) to repay the principal of, interest on and accrued fees with respect to the outstanding loans to the Trustee under the Existing Credit Agreement, (ii) to finance the purchase of Nuclear Fuel by the Trustee in accordance with the Trust Agreement and the Purchase Contract, (iii) to provide backup liquidity for commercial paper issued pursuant to the CP Program to finance such purchases and (iv) to pay interest and other amounts payable hereunder by the Trustee as needed. The Letters of Credit shall be issued, if for the account of El Paso, solely for general corporate purposes incurred in the ordinary course of business, and, if for the account of the Trustee, solely to support obligations incurred in the ordinary course of business by the Trustee in respect of the purchase of Nuclear Fuel in accordance with the Trust Agreement and the Purchase Contract and to provide backup liquidity for commercial paper issued to finance such purchases.

Accordingly, the parties hereto agree as follows:

ARTICLE I

D EFINITIONS

S ECTION 1.01. Defined Terms . As used in this Agreement, the following terms shall have the meanings specified below:

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“ ABR Borrowing ” shall mean a Borrowing comprised of ABR Loans.

“ ABR Loan ” shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II.

“ACC” shall mean the Arizona Corporation Commission or any Governmental Authority succeeding to any or all of such Commission’s authority.

“Administrative Agent Fees ” shall have the meaning assigned to such term in Section 2.05(b).

“ Administrative Questionnaire ” shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as shall be approved by the Administrative Agent.

“ Affiliate ” shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified.

“ Aggregate Credit Exposure ” shall mean the aggregate amount of the Lenders’ Credit Exposures.

“ Alternate Base Rate ” shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next ¹ / 16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus ½ of 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the preceding sentence, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively.

“ Applicable Percentage ” of any Lender at any time shall mean the percentage of the Total Commitment represented by such Lender’s Commitment. In the event the Commitments shall have expired or been terminated, the Applicable Percentages shall be determined on the basis of the Commitments most recently in effect.

“ Applicable Ratings ” shall mean at any time the credit ratings at such time by the Rating Agencies of the lower of the two most highly rated series of First Mortgage Bonds (other than any Collateral Series of First Mortgage Bonds; provided , however , that if there should be fewer than two series of such First Mortgage Bonds outstanding, the “ Applicable Ratings ” shall mean the credit ratings at such time by the Rating Agencies of the credit facilities provided under this Agreement.

“ Applicable Spread ” shall mean, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the Commitment Fee, as the case may be, the applicable percentage set forth below under the caption “ABR Spread”, “LIBOR Spread” or “Commitment Fee”, as the case may be, based upon the higher of the Applicable Ratings:

		Applicable Ratings (S&P/Moody’s)		ABR Spread		LIBOR Spread		Commitment Fee
Category 1		BBB+/Baa1 or higher		0.125%		1.125%		0.200%

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Category 2	BBB/Baa2	0.250%	1.250%	0.250%
Category 3	BBB-/Baa3	0.375%	1.375%	0.300%
Category 4	Less than BBB/Baa3	0.625%	1.625%	0.375%

Notwithstanding the foregoing (x) if (i) both Rating Agencies cease to provide a current Applicable Rating or (ii) if the Applicable Rating of either Rating Agency shall be below BBB- or Baa3, as the same may be, the Applicable Spread shall correspond to the percentages listed in Category 4; and (y) at any time after the occurrence and during the continuation of an Event of Default, the Applicable Spread shall correspond to the percentages listed in Category 4.

“ Arizona Public Utility Act ” shall mean Chapter 2, Title 40 of the Arizona Revised Statutes and the rules and regulations promulgated thereunder, as amended from time to time.

“ Assessment Rate ” shall mean for any date the annual rate (rounded upwards, if necessary, to the next ¹ / 100 of 1%) most recently estimated by the Administrative Agent as the then current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor thereto) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent’s domestic offices.

“Assigned Agreements” shall mean (a) each agreement listed on Schedule I to the Security Agreement, (b) each agreement assigned by El Paso to the Trustee after the Original Closing Date (including any such agreements assigned after the Restatement Closing Date) pursuant to the Purchase Contract and (c) each Assignment Agreement (as defined in the Purchase Contract) related to an agreement referred to in clause (a) or (b) above, in each case as amended, supplemented or otherwise modified from time to time.

“ Assignment and Acceptance ” shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent.

“ Atomic Energy Act ” shall mean the Atomic Energy Act of 1954, 42 U.S.C. §§ 2011 et seq . and the rules and regulations promulgated thereunder, as amended from time to time.

“ Base CD Rate ” shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate.

“ Board ” shall mean the Board of Governors of the Federal Reserve System of the United States of America.

“ Borrowing ” shall mean a group of Loans of a single Type made by the Lenders to the same Borrower on a single date and as to which a single Interest Period is in effect.

“ Borrowing Request ” shall mean a request by a Borrower in accordance with the terms of Section 2.03 and substantially in the form of Exhibit C.

“ Business Day ” shall mean any day other than a Saturday, Sunday or day on which banks in New York City are authorized or required by law to close; provided , however , that when used in connection with a Eurodollar Loan, the term “ Business Day ” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

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“ Capital Lease Obligations ” of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

A “ Change in Control ” shall be deemed to have occurred if (a) any person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of El Paso; (b) a majority of the members of the Board of Directors of El Paso are not Continuing Directors; (c) any change in control (or similar event, however denominated) with respect to El Paso shall occur under and as defined in the Indenture or any indenture supplemental thereto.

“ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time.

“ Collateral ” shall mean (i) $100,000,000 principal amount of First Mortgage Bonds—Collateral Series H, which First Mortgage Bonds are secured by the lien of the Indenture in the Mortgaged Property in favor of the Indenture Trustee and (ii) all the “Collateral” as defined in the Security Agreement and the Pledge Agreement.

“ Commitment ” shall mean, with respect to each Lender, the commitment of such Lender to make Loans hereunder as set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender assumed its Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 or pursuant to Section 2.19 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 11.04.

“ Commitment Fee ” shall have the meaning assigned to such term in Section 2.05(a).

“ Common Stock ” shall have the meaning assigned to such term in Section 3.22.

“ Confidential Information Memorandum ” shall mean the Confidential Information Memorandum of El Paso dated November 2001.

“ Consolidated Capital Expenditures ” shall mean, for any period, the sum of (a) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability), excluding capitalized interest, by El Paso or any of the Subsidiaries during such period that, in accordance with GAAP, are or should be included in “additions to property, plant and equipment” or similar items reflected in the consolidated statement of cash flows of El Paso and the Subsidiaries for such period (including the amount of assets leased in connection with any Capital Lease Obligation), and (b) to the extent not included pursuant to clause (a) above, the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability) by El Paso or any Subsidiary to acquire, by purchase or otherwise, the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any person. Notwithstanding the foregoing, (i) any purchase of Nuclear Fuel by El Paso pursuant to the Purchase Contract, (ii) any generating capacity addition and (iii) any other expenditure by El Paso or any other Subsidiary to the extent such expenditure is made in accordance with the terms of Section 6.05(c) shall not be deemed to be a capital expenditure for the purpose of determining, for any period, the Consolidated Capital Expenditures.

“ Consolidated Cash Flow ” shall mean, for any period, the Consolidated Net Income for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with a sale of assets (to the extent such losses were deducted in computing such Consolidated Net Income), plus (ii) provision for taxes based on income or profits of El Paso and the Subsidiaries for such period, to the extent that such provision for taxes was included in computing Consolidated Net Income, plus (iii) Consolidated Interest Expense for such period, whether paid or accrued and

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whether or not capitalized (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to any sale and leaseback transaction, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers’ acceptance financings, and net payments (if any) pursuant to hedging transactions, but excluding, however, the interest component of any deferred payment obligations), to the extent that any such expense was deducted in computing Consolidated Net Income, plus (iv) depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period) of El Paso and the Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing Consolidated Net Income, minus (v) cash payments made on any deferred payment obligations in such period, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Subsidiary shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income.

“ Consolidated EBITDA ” shall mean, for any period, Consolidated Net Income for such period, plus , to the extent deducted in computing such Consolidated Net Income, (a) the sum of (i) all Federal, state, local and foreign taxes, (ii) total interest expense (excluding the interest component of any deferred payment obligation) and (iii) depreciation, depletion, amortization of intangibles and other non-cash charges or non-cash losses (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period), minus , to the extent added in computing such Consolidated Net Income, (b) the sum of (i) any interest income and (ii) any non-cash income or non-cash gains, all as determined on a consolidated basis with respect to El Paso and the Subsidiaries in accordance with GAAP.

“ Consolidated Interest Coverage Ratio ” shall mean, for any period, the ratio for such period of (a) Consolidated EBITDA to (b) Consolidated Interest Expense.

“ Consolidated Interest Expense ” shall mean, for any period, the gross interest expense of El Paso and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, (a) including (i) the amortization of debt discounts, (ii) the amortization of all fees (including fees with respect to Rate Protection Agreements) payable in connection with the incurrence of Indebtedness to the extent included in interest expense in accordance with GAAP and (iii) the portion of any payments or accruals with respect to Capital Lease Obligations that are allocable to interest expense in accordance with GAAP and (b) excluding the interest component of any deferred payment obligation. For purposes of the foregoing, gross interest expense shall be determined after giving effect to any net payments made or received by the Borrower or any Subsidiary with respect to Rate Protection Agreements.

“ Consolidated Net Income ” shall mean, for any period, net income or loss of El Paso and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any person in which any other person (other than El Paso or any of its Wholly Owned Subsidiaries or any director holding qualifying shares in accordance with applicable law) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to El Paso or any Wholly Owned Subsidiary by such person during such period, (b) the income (or loss) of any person accrued prior to the date it becomes a Subsidiary of El Paso or is merged into or consolidated with El Paso or any of the Subsidiaries or the date such person’s assets are acquired by El Paso or any of the Subsidiaries, (c) the income of any Subsidiary of El Paso to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental

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regulation applicable to such Subsidiary and (d) any after tax gains or losses attributable to sales of assets out of the ordinary course of business.

“ Continuing Directors ” shall mean, as of any date of determination, any member of the board of directors of El Paso who (i) was a member of such board of directors on the Restatement Closing Date or (ii) was nominated for election or elected to such board of directors with the approval of a majority of Continuing Directors who were members of such board at the time of such nomination or election.

“ Control ” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and “ Controlling ” and “ Controlled ” shall have meanings correlative thereto.

“ CP Program ” shall mean a commercial paper program established by the Trustee pursuant to documentation satisfactory to the Required Lenders for the purpose of financing the purchase of Nuclear Fuel.

“ Credit Event ” shall have the meaning assigned to such term in Section 4.01.

“ Credit Exposure ” shall mean, with respect to any Lender at any time, the aggregate principal amount at such time of all outstanding Loans of such Lender plus the aggregate amount at such time of such Lender’s L/C Exposure.

“ Default ” shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default.

“ dollars ” or “ $ ” shall mean lawful money of the United States of America.

“ Domestic Subsidiary ” shall mean any Subsidiary that is incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia.

“ El Paso L/C Exposure ” shall mean that part of the L/C Exposure attributable to all Letters of Credit issued for the account of El Paso.

“ El Paso Obligations ” shall have the meaning assigned to such term in Section 10.01.

“ environment ” shall mean ambient air, surface water and groundwater (including potable water, navigable water and wetlands), the land surface or subsurface strata, the workplace or as otherwise defined in any Environmental Law.

“ Environmental Claim ” shall mean any written accusation, allegation, notice of violation, claim, demand, order, directive, consent decree, cost recovery action or other cause of action by, or on behalf of, any Governmental Authority or any person for damages, injunctive or equitable relief, personal injury (including sickness, disease or death), Remedial Action costs, tangible or intangible property damage, natural resource damages, nuisance, pollution, any adverse effect on the environment caused by any Hazardous Material, or for fines, penalties or restrictions, resulting from or based upon: (a) the existence, or the continuation of the existence, of a Release (including sudden or non-sudden, accidental or non-accidental Releases); (b) exposure to any Hazardous Material; (c) the presence, use, handling, transportation, storage, treatment or disposal of any Hazardous Material; or (d) the violation or alleged violation of any Environmental Law or Environmental Permit.

“ Environmental Law ” shall mean any and all applicable present and future treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way

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to the environment, preservation or reclamation of natural resources, the management, Release or threatened Release of any Hazardous Material or to health and safety matters, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq. (collectively “ CERCLA ”), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et seq. , the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et seq. , the Clean Air Act of 1970, 42 U.S.C. §§ 7401 et seq. , as amended, the Toxic Substances Control Act of 1976, 15 U.S.C. §§ 2601 et seq. , the Occupational Safety and Health Act of 1970, as amended by 29 U.S.C. §§ 651 et seq. , the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq. , the Safe Drinking Water Act of 1974, as amended by 42 U.S.C. §§ 300(f) et seq. , the Hazardous Materials Transportation Act, 49 U.S.C. §§ 5101 et seq. , the Atomic Energy Act and Low-Level Radioactive Waste Policy Act, 42 U.S.C. §§ 2014 et seq. , as amended, and any similar or implementing state or local law, and all amendments or regulations promulgated thereunder.

“ Environmental Permit ” shall mean any permit, approval, authorization, certificate, license, variance, filing or permission required by or from any Governmental Authority pursuant to any Environmental Law.

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time.

“ ERISA Affiliate ” shall mean any trade or business (whether or not incorporated) that, together with El Paso, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ ERISA Event ” shall mean (a) any “ reportable event ”, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an “ accumulated funding deficiency ” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of El Paso or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (f) the receipt by El Paso or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by El Paso or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a “ prohibited transaction ” with respect to which El Paso or any of the Subsidiaries is a “ disqualified person ” (within the meaning of Section 4975 of the Code) or with respect to which El Paso or any such Subsidiary could otherwise be liable; and (i) any other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be expected to result in liability of El Paso.

“ Eurodollar Borrowing ” shall mean a Borrowing comprised of Eurodollar Loans.

“ Eurodollar Loan ” shall mean any Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II.

“ Event of Default ” shall have the meaning assigned to such term in Article VII.

“ Existing Maturity Date ” shall mean February 12, 2002.

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“Farmington Loan Agreements” shall mean, individually and collectively, (a) the Installment Sale Agreement dated as of November 1, 1983, between the City of Farmington, New Mexico and El Paso and (b) the Amended and Restated Installment Sale Agreement dated as of November 1, 1994, between the City of Farmington, New Mexico and El Paso, in each case as amended from time to time in accordance with the terms hereof and thereof.

“Farmington Reimbursement Agreement” shall have the meaning assigned to such term in the Indenture.

“ Federal Funds Effective Rate ” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

“ Federal Power Act ” shall mean the Federal Power Act of 1920, 16 U.S.C. §§ 791a et seq. , and the rules and regulations promulgated thereunder, as amended from time to time.

“ Fee Letter ” shall mean the Fee Letter dated November 15, 2001, among El Paso, the Administrative Agent and J.P. Morgan Securities Inc.

“ Fees ” shall mean the Commitment Fees, the Administrative Agent’s Fees, the L/C Participation Fees and the Issuing Bank Fees.

“ FERC ” shall mean the Federal Energy Regulatory Commission, or any Governmental Authority succeeding to any or all of such Commission’s authority.

“ Financial Officer ” of any person shall mean the chief financial officer, principal accounting officer, treasurer, controller or other vice president with financial planning responsibilities of such person.

“ Finsub ” shall mean a corporation organized under the laws of a state of the United States of America which is a special purpose wholly-owned subsidiary of El Paso formed solely for the purpose of engaging in the Receivables Program.

“ First Mortgage Bonds ” shall mean each of the Series C, Series D, Series E, Collateral Series H First Mortgage Bonds of El Paso issued pursuant to the Indenture.

“ First Mortgage Bonds—Collateral Series H ” shall mean the Collateral Series H First Mortgage Bonds.

“ Fixed Charge Coverage Ratio ” shall mean, for any period, the ratio of Consolidated Cash Flow for such period to Fixed Charges for such period. In the event that El Paso or any of the Subsidiaries incurs, assumes, Guarantees or redeems any Indebtedness (other than Indebtedness created hereunder) or issues any series of preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the “ Calculation Date ”), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of any series of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. For purposes of making the computation referred to above, (i) acquisitions that have been made by El Paso or any of the Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period, and (ii) Consolidated

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Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges shall not be obligations of El Paso or any of the Subsidiaries following the Calculation Date.

“ Fixed Charges ” shall mean, for any period, the sum of (i) Consolidated Interest Expense for such period, whether paid or accrued (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of all payments associated with Capital Lease Obligations, imputed interest with respect to any sale and leaseback transactions, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers’ acceptance financings, and net payments (if any) pursuant to hedging transactions, but excluding, however, the interest component of any deferred payment obligations), (ii) Consolidated Interest Expense that was capitalized during such period, (iii) any interest expense on Indebtedness of another person that is Guaranteed by El Paso or one of the Subsidiaries or secured by a Lien on assets of El Paso or one of the Subsidiaries (whether or not such Guarantee or Lien is called upon), and (iv) all cash dividend payments on any series of preferred stock, in each case, on a consolidated basis and in accordance with GAAP.

“ Fourth Supplemental Indenture ” shall mean the Fourth Supplemental Indenture dated as of the Restatement Closing Date, substantially in the form of Exhibit H.

“ GAAP ” shall mean generally accepted accounting principles in the United States of America applied on a consistent basis.

“ Governmental Authority ” shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body.

“ Guarantee ” of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the “ primary obligor ”) in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided , however , that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

“ Hazardous Materials ” shall mean all explosive or radioactive substances or wastes, hazardous or toxic substances or wastes, pollutants, solid, liquid or gaseous wastes, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls (“ PCBs ”) or PCB-containing materials or equipment, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

“ Inactive Subsidiary ” shall mean, at any time, any Subsidiary that (a) has assets at such time of $25,000 or less and (b) has not conducted any business activity during the prior six-month period.

“ Indebtedness ” of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the

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ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements, (j) all obligations of such person as an account party in respect of letters of credit and (k) all obligations of such person as an account party in respect of bankers’ acceptances. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner.

“ Indenture ” shall mean the General Mortgage Indenture and Deed of Trust dated as of February 1, 1996, by El Paso to the Indenture Trustee, as supplemented by the First Supplemental Indenture dated as of February 1, 1996, the Second Supplemental Indenture dated as of August 19, 1997, the Third Supplemental Indenture dated as of January 29, 1999 and the Fourth Supplemental Indenture and as the same may be further supplemented, amended or otherwise modified from time to time in accordance with the provisions thereof and hereof.

“Indenture Trustee” shall mean the State Street Bank and Trust Company, as trustee under the Indenture, together with its successors and assigns in such capacity.

“ Interest Payment Date ” shall mean, (a) with respect to any ABR Loan, the last day of each March, June, September and December, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months’ duration been applicable to such Borrowing.

“ Interest Period ” shall mean, as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the applicable Borrower may elect; provided , however , that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period.

“ Issuing Bank Fees ” shall have the meaning assigned to such term in Section 2.05(c).

“ JPMorgan” shall mean JPMorgan Chase Bank, a New York banking corporation, together with its successors and assigns.

“ L/C Commitment ” shall mean the commitment of the Issuing Bank to issue Letters of Credit pursuant to Section 2.20.

“ L/C Disbursement ” shall mean a payment or disbursement made by the Issuing Bank pursuant to a Letter of Credit.

“ L/C Exposure ” shall mean at any time the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate principal amount of all L/C Disbursements that have not yet been reimbursed at such time. The L/C Exposure of any Lender at any time shall mean its Applicable Percentage of the aggregate L/C Exposure at such time.

“ L/C Participation Fee ” shall have the meaning assigned to such term in Section 2.05(c).

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“ Lenders ” shall mean (a) the financial institutions listed on Schedule 2.01 (other than any such financial institution that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any financial institution that has become a party hereto pursuant to an Assignment and Acceptance.

“ Letter of Credit ” shall mean any letter of credit issued pursuant to Section 2.20.

“ LIBO Rate ” shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the “ LIBO Rate ” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

“ Lien ” shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

“ Loan Documents ” shall mean this Agreement, the Letters of Credit, the Security Agreement, each Subsidiary Guarantee Agreement and each Pledge Agreement.

“ Loan Parties ” shall mean the Borrowers and any Subsidiary that shall become a guarantor of the El Paso Obligations pursuant to Section 5.10.

“ Loans ” shall mean the loans made by the Lenders to the Borrowers pursuant to Section 2.01. Each Loan shall be a Eurodollar Loan or an ABR Loan.

“ Margin Stock ” shall have the meaning assigned to such term in Regulation U.

“Maricopa Loan Agreements” shall mean, individually and collectively, (a) the Loan Agreement dated as of December 1, 1983, between Maricopa County, Arizona Pollution Control Corporation (“ Maricopa ”) and El Paso, (b) the Loan Agreement dated as of July 1, 1994, between Maricopa and El Paso, (c) the Loan Agreement dated as of December 1, 1984, between Maricopa and El Paso, and (d) the Loan Agreement dated as of August 1, 1985, between Maricopa and El Paso, in each case as amended from time to time in accordance with the provisions hereof and thereof.

“Maricopa Reimbursement Agreement” shall have the meaning assigned to such term in the Indenture.

“ Material Adverse Effect ” shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of El Paso and the Subsidiaries, taken as a whole, (b) material impairment of the ability of the Trustee, El Paso or any other Loan Party to perform any of its obligations under any Transaction Document to which it is or will be a party or (c) material impairment of the rights of the Lenders under any Transaction Document.

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“ Maturity Date ” shall mean the third anniversary of the Restatement Closing Date.

“ Mirasol ” shall mean Mirasol Energy Services, Inc., a Delaware corporation, together with its successors and assigns.

“ Moody’s ” shall mean Moody’s Investors Service, Inc., and its successors.

“ Mortgaged Property ” shall have the meaning assigned to such term in the Indenture.

“ Multiemployer Plan ” shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“ New Mexico Public Utility Act ” shall mean the New Mexico Public Utility Act, N.M. Stat. Ann. §§ 62-13-1 et seq ., and the rules and regulations promulgated thereunder, as amended from time to time.

“ NMPRC ” shall mean the New Mexico Public Regulation Commission or any Governmental Authority succeeding to any or all of such Commission’s authority.

“ NRC ” shall mean the Nuclear Regulatory Commission or any Governmental Authority succeeding to any or all of such Commission’s authority.

“ Nuclear Fuel ” shall have the meaning assigned to such term in the Purchase Contract.

“ Nuclear Waste Act ” shall mean the Nuclear Waste Policy Act of 1982, 42 U.S.C. §§ 10101 et seq. , the Nuclear Waste Policy Amendments Act of 1987, 42 U.S.C. §§ 10172, 10172a et seq. , and the rules and regulations promulgated thereunder, as amended from time to time.

“ Obligations ” shall mean, collectively, the Trust Obligations and the El Paso Obligations.

“ Original Closing Date ” shall mean February 12, 1996.

“ PBGC ” shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA.

“ Permitted Investments ” shall mean:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof, and repurchase obligations with a term of not more than seven days for underlying securities of the type described in this clause (a) (without regard to their maturity) entered into with financial institutions with the minimum amount of capital and surplus specified in clause (c) below;

(b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or Moody’s;

(c) investments in certificates of deposit, banker’s acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank (including the Trustee) organized under the laws of the United States of America or any state thereof which has a combined capital and surplus and undivided profits of not less than $250,000,000;

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(d) investments in money market or other mutual funds substantially all of the assets of which consist of investments of the types described in clauses (a) through (c) above; and

(e) other investment instruments approved in writing by the Required Lenders and offered by financial institutions which have a combined capital and surplus and undivided profits of not less than $250,000,000.

“ person ” shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership or government, or any agency or political subdivision thereof.

“ Plan ” shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“ Pledge Agreement ” shall mean each pledge agreement delivered pursuant to Section 5.10 for the benefit of the Secured Parties, each substantially in the form of Exhibit E.

“ Prime Rate ” shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective.

“ PUCT ” shall mean the Public Utility Commission of Texas or any Governmental Authority succeeding to any or all of such Commission’s authority.

“ Purchase Contract ” shall mean the Purchase Contract dated as of February 12, 1996, as amended as of February 11, 1999, between the Trustee and El Paso, as the same may be further amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof.

“ Purchase Contract Default ” shall have the meaning assigned to the term “Event of Default” in Section 19(a) of the Purchase Contract.

“ Rate Protection Agreements ” shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or similar agreement or arrangement designed to protect El Paso against fluctuations in interest rates and not for speculation.

“ Rating Agency ” shall mean S&P and Moody’s.

“ Receivables Program ” shall mean, collectively, (a) the sale of, or transfer of interests in, account receivables and related contract rights (“ Receivables ”) of El Paso to Finsub and (b) the transfer of such Receivables by Finsub to a special purpose trust or corporation which is not an Affiliate of El Paso or Finsub; provided , that all terms and conditions (including, without limitation, any terms or conditions providing for recourse to El Paso or any of the Subsidiaries (other than Finsub)) of, and all documentation relating to, the Receivables Program shall be subject to the prior written approval of the Required Lenders (it being understood and agreed that certain amendments to Article VI and the other provisions of this Agreement may be required in connection with the implementation of the Receivables Program).

“ Receivables Program Documents ” shall mean all agreements, in form and substance reasonably satisfactory to the Required Lenders, that may from time to time be entered into by El Paso or a Subsidiary in connection with any Receivables Program, as such agreements may be

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amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof.

“ Regional Transmission Organization ” shall mean an entity that satisfies the minimum characteristics, performs the functions, and accommodates the open architecture condition set forth in FERC regulations.

“ Register ” shall have the meaning given such term in Section 11.04(d).

“ Regulation T ” shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“ Regulation U ” shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“ Regulation X ” shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof.

“ Release ” shall mean any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, emanating or migrating of any Hazardous Material in, into, onto or through the environment.

“ Remedial Action ” shall mean (i) “ remedial action ” as such term is defined in CERCLA, 42 U.S.C. § 9601(24), and (ii) all other actions required by any Governmental Authority or voluntarily undertaken to: (x) cleanup, remove, treat, abate or in any other way address any Hazardous Material in the environment; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material so it does not migrate or endanger or threaten to endanger public health, welfare or the environment; or (z) perform studies and investigations in connection with, or as a precondition to, (x) or (y) above.

“ Required Lenders ” shall mean, at any time, Lenders having Loans, L/C Exposure and unused Commitments representing more than 50% of the sum of all Loans outstanding, L/C Exposure and unused Commitments at such time.

“ Responsible Officer ” of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement.

“ Restatement Closing Date ” shall mean January 28, 2002.

“Rio Grande Resources Trust II” shall mean the trust created by the Trust Agreement.

“ Sale-Leaseback Transaction ” shall have the meaning assigned to such term in Section 6.03.

“ Secured Parties ” shall have the meaning assigned to such term in the Security Agreement.

“ Securities Act ” shall mean the Securities Act of 1933, as amended from time to time.

“ Securities Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.

“ Security Agreement ” shall mean the Amended and Restated Security Agreement and Assignment of Contracts dated as of the Restatement Closing Date between the Trustee and the Collateral Agent for the benefit of the Secured Parties, in the form of Exhibit D.

“ S&P ” shall mean Standard & Poor’s Rating Services and its successors.

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“ Statutory Reserves ” shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative Agent or any Lender (including any branch, Affiliate, or other fronting office making or holding a Loan) is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“ Stockholders’ Equity ” shall mean, as at any date of determination, the stockholders’ equity at such date of El Paso, as determined in accordance with GAAP.

“ subsidiary ” shall mean, with respect to any person (herein referred to as the “ parent ”), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

“ Subsidiary ” shall mean any subsidiary of El Paso.

“ Subsidiary Guarantee Agreement ” shall mean each guarantee agreement delivered pursuant to Section 5.10 for the benefit of the Secured Parties, each substantially in the form of Exhibit F.

“ Texas Public Utility Regulatory Act ” shall mean the Texas Public Utility Regulatory Act of 1995, and the rules and regulations promulgated thereunder, as amended from time to time.

“ Three-Month Secondary CD Rate ” shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it.

“ Total Consolidated Capital ” shall mean, as at any date of determination, the sum of Total Debt on such date and Stockholders’ Equity at such date.

“ Total Commitment ” shall mean, at any time, the aggregate amount of the Commitments, as in effect at such time. The Total Commitment as of the Restatement Closing Date is $100,000,000.

“ Total Consolidated Debt ” shall mean, as of any date of determination, all Indebtedness (excluding Indebtedness of the type described in clauses (i) and (k) of the definition of the term

“ Indebtedness ”) of El Paso at such date.

“ Transaction Documents ” shall mean the Loan Documents, the Indenture and the First Mortgage Bonds—Collateral Series H.

“ Transactions ” shall have the meaning assigned to such term in Section 3.02.

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“ Trust Agreement ” shall mean the Trust Agreement dated as of February 12, 1996, between the Trustee and El Paso, providing for the creation of the Rio Grande Resources Trust II, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the provisions thereof and hereof.

“ Trust Indenture Act ” shall mean the Trust Indenture Act of 1939, and the rules and regulations promulgated thereunder, as amended from time to time.

“ Trust Obligations ” shall have the meaning assigned to such term in Section 9.01.

“ Trust Termination Date ” shall mean the date of any termination of the Purchase Contract.

“ Trustee L/C Exposure ” shall mean that part of the L/C Exposure attributable to all Letters of Credit issued for the account of the Trustee.

“ Trustee’s Liens ” shall have the meaning assigned to such term in the Purchase Contract.

“ Type ”, when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term “ Rate ”shall include the LIBO Rate and the Alternate Base Rate.

“ Wholly Owned Subsidiary ” of any person (the “Parent” ) shall mean a subsidiary of the Parent of which securities (except for directors’ qualifying shares) or other ownership interests representing 100% of the equity or 100% of the ordinary voting power or 100% of the general partnership interests are, at the time any determination is being made, owned, controlled or held by the Parent and/or one or more Wholly Owned Subsidiaries of the Parent.

“ Withdrawal Liability ” shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

S ECTION 1.02. Terms Generally . The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “ include ”, “ includes ” and “ including ” shall be deemed to be followed by the phrase “ without limitation ” All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided , however , that, if El Paso notifies the Administrative Agent that El Paso wishes to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the Restatement Closing Date on the operation of such covenant (or if the Administrative Agent notifies El Paso that the Required Lenders wish to amend Article VI or any related definition for such purpose), then El Paso’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to El Paso and the Required Lenders.

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ARTICLE II

T HE C REDITS

S ECTION 2.01. Commitments . Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Loans to the Trustee or El Paso, at any time and from time to time on or after the date on which the conditions set forth in Section 4.02 are satisfied, and until the earlier of the Maturity Date and the termination of the Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in such Lender’s Credit Exposure exceeding such Lender’s Commitment; provided , however , that at no time shall the sum of (x) the aggregate principal amount of Loans outstanding to the Trustee and (y) the Trustee L/C Exposure exceed $70,000,000. Within the limits set forth in the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrowers may borrow, pay or prepay and reborrow Loans.

S ECTION 2.02. Loans . (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments; provided , however , that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Except for Loans deemed made pursuant to Section 2.02(f), the Loans comprising any Borrowing shall be in an aggregate principal amount that is (i)(A) with respect to any Eurodollar Borrowing, an integral multiple of $1,000,000 and not less than $5,000,000 or (B) with respect to any ABR Borrowing, an integral multiple of $1,000 and not less than $100,000 or (ii) equal to the remaining available balance of the Commitments.

(b) Subject to Sections 2.08 and 2.13, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the applicable Borrower may request pursuant to Section 2.03. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided , however , that the Borrowers shall not be entitled to request any Borrowing that, if made, would result in more than seven Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings.

(c) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Administrative Agent may designate not later than 11:00 a.m., New York City time, and the Administrative Agent shall by 12:00 (noon), New York City time, credit the amounts so received to an account in the name of the applicable Borrower maintained with the Administrative Agent and designated by such Borrower in the applicable Borrowing Request or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders.

(d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with paragraph (c) above and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the applicable Borrower severally agree to repay to the Administrative Agent forthwith on demand such

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corresponding amount together with interest thereon, for each day from the date such amount is made available to the applicable Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of either Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender’s Loan as part of such Borrowing for purposes of this Agreement.

(e) Notwithstanding any other provision of this Agreement, (i) neither Borrower shall be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date and (ii) the Trustee shall not be entitled to request any Borrowing on or after the Trust Termination Date.

(f) If the Issuing Bank shall not have received from the Trustee or El Paso, as the case may be, the payment required to be made by Section 2.20(e) within the time specified in such Section, the Issuing Bank will promptly notify the Administrative Agent of the L/C Disbursement and the Administrative Agent will promptly notify each Lender of such L/C Disbursement and its Applicable Percentage thereof. Each Lender shall pay by wire transfer of immediately available funds to the Administrative Agent not later than 2:00 p.m., New York City time, on such date (or, if such Lender shall have received such notice later than 12:00 (noon), New York City time, on any day, not later than 10:00 a.m., New York City time, on the immediately following Business Day), an amount equal to such Lender’s Applicable Percentage of such L/C Disbursement (it being understood that such amount shall be deemed to constitute an ABR Loan of such Lender and such payment shall be deemed to have reduced the L/C Exposure by such amount), and the Administrative Agent will promptly pay to the Issuing Bank amounts so received by it from the Lenders. The Administrative Agent will promptly pay to the Issuing Bank any amounts received by it from the Trustee or El Paso, as the case may be, pursuant to Section 2.20(e) prior to the time that any Lender makes any payment pursuant to this paragraph (f); any such amounts received by the Administrative Agent thereafter will be promptly remitted by the Administrative Agent to the Lenders that shall have made such payments and to the Issuing Bank, as their interests may appear. If any Lender shall not have made its Applicable Percentage of such L/C Disbursement available to the Administrative Agent as provided above, such Lender and the Trustee or El Paso, as the case may be, severally agree to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this paragraph to but excluding the date such amount is paid, to the Administrative Agent at (i) in the case of the Trustee or El Paso, as the case may be, a rate per annum equal to the interest rate applicable to ABR Loans pursuant to Section 2.06(a), and (ii) in the case of such Lender, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate.

S ECTION 2.03. Borrowing Procedure . In order to request a Borrowing (other than a deemed Borrowing pursuant to Section 2.02(f), as to which this Section 2.03 shall not apply), the applicable Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time, on the day of the proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on behalf of the applicable Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day); (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the amount of such Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto; provided , however , that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the applicable Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Administrative

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Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 (and the contents thereof), and of each Lender’s portion of the requested Borrowing.

S ECTION 2.04. Evidence of Debt; Repayment of Loans . (a) Each Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan made to such Borrower on the Maturity Date; provided , however, that if the Purchase Contract shall terminate prior to the Maturity Date, the Trustee shall repay the unpaid principal amount of each Loan made to it on the earlier of (i) the Maturity Date, (ii) the 150th day following the Trust Termination Date, (iii) if any Event of Default that is not a Purchase Contract Default shall be in existence on the Trust Termination Date or shall thereafter occur, the 10th day following the later to occur of the Trust Termination Date or such Event of Default or (iv) if a Purchase Contract Default shall have occurred, on (A) the date of such occurrence or (B) such later date as the Administrative Agent may elect.

(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of each Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid such Lender from time to time under this Agreement.

(c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from each Borrower and each Lender’s share thereof.

(d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) above shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided , however , that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrowers to repay the Loans in accordance with their terms.

(e) Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive a promissory note payable to such Lender and its registered assigns, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 11.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns.

S ECTION 2.05. Fees . (a) The Borrowers agree, jointly and severally, to pay to each Lender, through the Administrative Agent, on the last day of March, June, September and December in each year and on each date on which the Commitment of such Lender shall expire or be terminated as provided herein, a commitment fee (a “ Commitment Fee ”) equal to the Applicable Spread per annum in effect from time to time on the daily unused amount of the Commitment of such Lender during the preceding quarter (or other period commencing on the Restatement Closing Date or ending on the Maturity Date or the date on which the Commitments of such Lender shall expire or be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. The Commitment Fees due to each Lender shall commence to accrue on the Restatement Closing Date and shall cease to accrue on the date on which the Commitment of such Lender shall expire or be terminated as provided herein.

(b) The Borrowers agree, jointly and severally, to pay to the Administrative Agent the fees set forth in the Fee Letter at the times and in the amounts specified therein (the “ Administrative Agent Fees ”).

(c) The Borrowers agree, jointly and severally, to pay (i) to each Lender, through the Administrative Agent, on the last day of March, June, September and December of each year and on the date on which the Commitment of such Lender shall be terminated as provided herein, a fee

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(an “ L/C Participation Fee ”) calculated on such Lender’s Applicable Percentage of the daily aggregate L/C Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements) during the preceding quarter (or shorter period commencing on the Restatement Closing Date or ending on the Maturity Date or the date on which all Letters of Credit have been canceled or have expired and the Commitments of all Lenders shall have been terminated) at a rate per annum equal to the Applicable Spread from time to time used to determine the interest rate on Eurodollar Loans pursuant to Section 2.06(b) and (ii) to the Issuing Bank with respect to each Letter of Credit the fronting fees set forth in the Fee Letter (the “ Issuing Bank Fees ”). All L/C Participation Fees and Issuing Bank Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days.

(d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Issuing Bank Fees shall be paid directly to the Issuing Bank. Once paid, none of the Fees shall be refundable under any circumstances.

S ECTION 2.06. Interest on Loans . (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the Applicable Spread in effect from time to time.

(b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Spread in effect from time to time.

(c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate, LIBO Rate and Applicable Spread for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

S ECTION 2.07. Default Interest . If either Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, or under any other Loan Document, such Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) (a) in the case of overdue principal, at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus 2.00% per annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the sum of the Alternate Base Rate plus 2.00%.

S ECTION 2.08. Alternate Rate of Interest . In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrowers and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, any request by either Borrower for a Eurodollar Borrowing pursuant to Section 2.03 shall be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error.

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S ECTION 2.09. Termination and Reduction of Commitments . (a) The Commitments and the L/C Commitment shall automatically terminate on the Maturity Date.

(b) Upon at least three Business Days’ prior irrevocable written or telecopy notice to the Administrative Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided , however , that (i) each partial reduction of the Commitments shall be in an integral multiple of $1,000,000 and in a minimum amount of $5,000,000 and (ii) the Total Commitment shall not be reduced to an amount that is less than the Aggregate Credit Exposure at the time.

(c) Each reduction in the Commitments hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrowers shall pay to the Administrative Agent for the account of the applicable Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but excluding the date of such termination or reduction.

S ECTION 2.10. Conversion and Continuation of Borrowings . The applicable Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (a) not later than 12:00 (noon), New York City time, on the day of conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) not later than 10:00 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period, and (c) not later than 10:00 a.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following:

(i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing;

(ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type;

(iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by such Borrower at the time of conversion;

(iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, such Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.14;

(v) any portion of a Borrowing maturing in less than one month may not be converted into or continued as a Eurodollar Borrowing;

(vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing; and

(vii) upon notice to the Borrowers from the Administrative Agent given at the request of the Required Lenders, after the occurrence and during the continuance of a

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Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan.

Each notice pursuant to this Section 2.10 shall be irrevocable and shall refer to this Agreement and specify (w) the identity and amount of the Borrowing that the applicable Borrower requests be converted or continued, (x) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (y) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (z) if such Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the applicable Borrower shall be deemed to have selected an Interest Period of one month’s duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section 2.10 and of each Lender’s portion of any converted or continued Borrowing. If a Borrower shall not have given notice in accordance with this Section 2.10 to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.10 to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into an ABR Borrowing.

S ECTION 2.11. Optional Prepayment . (a) Each Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent before 12:00 (noon), New York City time (i) in the case of any prepayment of a Eurodollar Borrowing, at least three Business Days prior to the date designated for such prepayment or (ii) in the case of any prepayment of an ABR Borrowing, on the date of such prepayment; provided , however , that each partial prepayment shall be in an amount that is (x) in the case of any partial prepayment of a Eurodollar Borrowing, an integral multiple of $1,000,000 and not less than $5,000,000 or (y) in the case of any partial prepayment of an ABR Borrowing, an integral multiple of $1,000 and not less than $100,000.

(b) In the event of any termination of all the Commitments, each Borrower shall repay or prepay all its outstanding Borrowings on the date of such termination, together with accrued interest to but excluding the date of such payment. In the event of any partial reduction of the Commitments, then (i) at or prior to the effective date of such reduction or termination, the Administrative Agent shall notify the Borrowers and the Lenders of the Aggregate Credit Exposure after giving effect thereto and (ii) if the Aggregate Credit Exposure would exceed the Total Commitment after giving effect to such reduction or termination, then the Borrowers shall, on the date of such reduction or termination, repay or prepay Borrowings in an amount sufficient to eliminate such excess.

(c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.11 shall be subject to Section 2.14 but otherwise without premium or penalty. All prepayments under this Section 2.11 (other than prepayments of ABR Loans prior to the Maturity Date) shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment.

S ECTION 2.12. Reserve Requirements; Change in Circumstances . (a) Notwithstanding any other provision of this Agreement, if after the date of this Agreement, but prior to the first date on which the events described in clauses (w), (x), (y) and (z) of subsection (d) of this Section 2.12 shall have occurred (the “ Obligation Termination Date ”), any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender or the Issuing Bank or shall impose on such Lender or the Issuing Bank or the London interbank market any other condition affecting this

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Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein, and the result of any of the foregoing shall be to increase the cost to such Lender or the Issuing Bank of making or maintaining any Eurodollar Loan or increase the cost to any Lender or the Issuing Bank of issuing or maintaining any Letter of Credit or purchasing or maintaining a participation therein or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender or the Issuing Bank to be material, then the applicable Borrower will pay to such Lender or the Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.

(b) If any Lender or the Issuing Bank shall have determined that the adoption after the date hereof, but prior to the Obligation Termination Date, of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof, but prior to the Obligation Termination Date, in any such law, rule, regulation, agreement or guideline (whether such law, rule, regulation, agreement or guideline has been adopted) or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or the Issuing Bank or any Lender’s or the Issuing Bank’s holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority has or would have the effect of reducing the rate of return on such Lender’s or the Issuing Bank’s capital or on the capital of such Lender’s or the Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made or participation in Letters of Credit purchased by such Lender pursuant hereto or the Letters of Credit issued by the Issuing Bank pursuant hereto to a level below that which such Lender or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender’s or the Issuing Bank’s policies and the policies of such Lender’s or the Issuing Bank’s holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Bank to be material, then from time to time the applicable Borrower shall pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company for any such reduction suffered.

(c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as applicable, as specified in paragraph (a) or (b) above shall be delivered to the applicable Borrower and shall be conclusive absent manifest error. The applicable Borrower shall pay such Lender or the Issuing Bank the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same.

(d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender’s or the Issuing Bank’s right to demand such compensation under this Section 2.12 for any costs incurred or reduction suffered with respect to any date so long as such Lender or the Issuing Bank, as applicable, shall have notified the applicable Borrower that it will demand compensation for such costs or reduction under paragraph (c) above, not more than 90 days after the later of (i) such date and (ii) the date on which such Lender or the Issuing Bank, as applicable, shall have become aware of such costs or reduction. Notwithstanding the foregoing, no notification contemplated by the preceding sentence shall in any event be made more than 30 days after the date that (w) all the Obligations have been indefeasibly paid in full, (x) the Lenders have no further commitment to lend to either of the Borrowers under this Agreement, (y) the L/C Exposure has been reduced to zero and (z) the Issuing Bank has no further obligation to issue Letters of Credit under this Agreement. The protection of this Section 2.12 shall be available to each Lender and the Issuing Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, agreement, guideline or other change or condition that shall have occurred or been imposed.

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S ECTION 2.13. Change in Legality . (a) Notwithstanding any other provision of this Agreement, if, after the date hereof, any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrowers and to the Administrative Agent:

(i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and

(ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below.

In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans.

(b) For purposes of this Section 2.13, a notice to the Borrowers by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrowers.

S ECTION 2.14. Indemnity . Each Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan to such Borrower prior to the end of the Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan to such Borrower to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan to such Borrower, in each case other than on the last day of the Interest Period in effect therefor, or (iii) any Eurodollar Loan to be made by such Lender to such Borrower (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by such Borrower hereunder (any of the events referred to in this clause (a) being called a “ Breakage Event ”) or (b) any default by such Borrower in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section 2.14 shall be delivered to the applicable Borrower and shall be conclusive absent manifest error.

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S ECTION 2.15. Pro Rata Treatment . Except as required under Section 2.13, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees and the L/C Participation Fees, each reduction of the Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender’s portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender’s percentage of such Borrowing to the next higher or lower whole dollar amount.

S ECTION 2.16. Sharing of Setoffs . Each Lender agrees that if it shall, through the exercise of a right of banker’s lien, setoff or counterclaim against either Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid principal portion of its Loans and participation in L/C Disbursements shall be proportionately less than the unpaid principal portion of the Loans and participation in L/C Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans and L/C Exposure of such other Lender, so that the aggregate unpaid principal amount of the Loans and L/C Exposure and participation in Loans and L/C Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding as the principal amount of its Loans and L/C Exposure prior to such exercise of banker’s lien, setoff or counterclaim or other event was to the principal amount of all Loans and L/C Exposure outstanding prior to such exercise of banker’s lien, setoff or counterclaim or other event; provided , however , that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.16 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. Each Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan or L/C Disbursement deemed to have been so purchased may exercise any and all rights of banker’s lien, setoff or counterclaim with respect to any and all moneys owing by such Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to such Borrower in the amount of such participation.

S ECTION 2.17. Payments . (a) Each Borrower shall make each payment (including principal of or interest on any Borrowing or any L/C Disbursement or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 (noon), New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment (other than Issuing Bank Fees, which shall be paid directly to the Issuing Bank if other than the Administrative Agent) shall be made to the Administrative Agent at its offices at One Chase Manhattan Plaza, New York, New York.

(b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable.

S ECTION 2.18. Taxes . (a) Any and all payments by or on behalf of either Borrower hereunder and under any other Loan Document shall be made, in accordance with Section 2.17, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the net income of the Administrative Agent, any Lender or the Issuing Bank (or

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any transferee or assignee thereof, including a participation holder (any such entity a “ Transferee ”) and (ii) franchise taxes imposed on the net income of the Administrative Agent, any Lender or the Issuing Bank (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent, such Lender or the Issuing Bank (or Transferee) is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, being called “ Taxes ”. If a Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to the Administrative Agent, any Lender or the Issuing Bank (or any Transferee), (i) the sum payable shall be increased by the amount (an “ additional amount ”) necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.18) the Administrative Agent, such Lender or the Issuing Bank (or Transferee), as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) such Borrower shall make such deductions and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

(b) In addition, each Borrower agrees to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under any other Loan Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (“ Other Taxes ”).

(c) The Borrowers jointly and severally agree to indemnify the Administrative Agent, each Lender and the Issuing Bank (or Transferee) for the full amount of Taxes and Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank (or Transferee), as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney’s fees, charges and disbursements)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by the Administrative Agent, a Lender or the Issuing Bank (or Transferee), or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date the Administrative Agent, any Lender or the Issuing Bank (or Transferee), as the case may be, makes written demand therefor.

(d) As soon as practicable after the date of any payment of Taxes or Other Taxes by either Borrower to the relevant Governmental Authority, such Borrower will deliver to the Administrative Agent, at its address referred to in Section 11.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof.

(e) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a “ Non-U.S. Lender ”) shall deliver to the Borrowers and the Administrative Agent two copies of either United States Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a Form W-8BEN, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8BEN, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of either Borrower and is not a controlled foreign corporation related to either Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrowers under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a “ New Lending Office ”). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the

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obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.18(e), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.18(e) that such Non-U.S. Lender is not legally able to deliver.

(f) Neither Borrower shall be required to indemnify any Non-U.S. Lender or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided , however , that this paragraph (f) shall not apply (x) to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Borrowers and (y) to the extent the indemnity payment or additional amounts any Transferee, or any Lender (or Transferee), acting through a New Lending Office, would be entitled to receive (without regard to this paragraph (f)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (e) above.

(g) Nothing contained in this Section 2.18 shall require any Lender or the Issuing Bank (or any Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary).

S ECTION 2.19. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate . (a) In the event (i) any Lender or the Issuing Bank delivers a certificate requesting compensation pursuant to Section 2.12, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.13 or (iii) either Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.18, the Borrowers may, at their sole expense and effort (including with respect to the processing and recordation fee referred to in Section 11.04(b)), upon notice to such Lender or the Issuing Bank and the Administrative Agent, require such Lender or the Issuing Bank to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 11.04), all of its interests, rights and obligations under this Agreement to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) except in connection with an assignment to another Lender or an Affiliate thereof, the Borrowers shall have received the prior written consent of the Administrative Agent and the Issuing Bank, which consent shall not unreasonably be withheld, and (z) the Borrowers or such assignee shall have paid to the affected Lender or the Issuing Bank in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans or L/C Disbursements of such Lender or the Issuing Bank, respectively, plus all Fees and other amounts accrued for the account of such Lender or the Issuing Bank hereunder (including any amounts under Section 2.12 and Section 2.14); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender’s or the Issuing Bank’s claim for compensation under Section 2.12 or notice under Section 2.13 or the amounts paid pursuant to Section 2.18, as the case may be, cease to cause such Lender or the Issuing Bank to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.13, or cease to result in amounts being payable under Section 2.18, as the case may be (including as a result of any action taken by such Lender or the Issuing Bank pursuant to paragraph (b) below), or if such Lender or the Issuing Bank shall waive its

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right to claim further compensation under Section 2.12 in respect of such circumstances or event or shall withdraw its notice under Section 2.13 or shall waive its right to further payments under Section 2.18 in respect of such circumstances or event, as the case may be, then such Lender or the Issuing Bank shall not thereafter be required to make any such transfer and assignment hereunder.

(b) If (i) any Lender or the Issuing Bank shall request compensation under Section 2.12, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.13 or (iii) either Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.18, then such Lender or the Issuing Bank shall use reasonable efforts (which shall not require such Lender or the Issuing Bank to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Borrowers or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.12 or enable it to withdraw its notice pursuant to Section 2.13 or would reduce amounts payable pursuant to Section 2.18, as the case may be, in the future. The Borrowers hereby agree, jointly and severally, to pay all reasonable costs and expenses incurred by any Lender or the Issuing Bank in connection with any such filing or assignment, delegation and transfer.

S ECTION 2.20. Letters of Credit . (a) General . Each of the Borrowers may request the issuance of a Letter of Credit, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, appropriately completed, for the account of such Borrower, at any time and from time to time while the Commitments remain in effect and the Trust Termination Date has not occurred. This Section 2.20 shall not be construed to impose an obligation upon the Issuing Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement.

(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions . In order to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of Credit), the requesting Borrower shall hand deliver or telecopy to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) below), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended for the account of the Trustee, only if, and upon issuance, amendment, renewal or extension of each Letter of Credit for the account of the Trustee, the Trustee shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension (A) the sum of (i) the aggregate principal amount of the Loans outstanding to the Trustee and (ii) the Trustee L/C Exposure shall not exceed $70,000,000 and (B) the Aggregate Credit Exposure shall not exceed the Total Commitment. A Letter of Credit shall be issued, amended, renewed or extended for the account of El Paso only if, and upon issuance, amendment, renewal or extension of each Letter of Credit for the account of El Paso, El Paso shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or extension, the Aggregate Credit Exposure shall not exceed the Total Commitment.

(c) Expiration Date . Each Letter of Credit shall expire at the close of business on the earlier of the date one year after the date of the issuance of such Letter of Credit and the date that is five Business Days prior to the Maturity Date, unless such Letter of Credit expires by its terms on an earlier date. Each Letter of Credit may, upon the request of the applicable Borrower, include a provision whereby such Letter of Credit shall be renewed automatically for additional consecutive periods of 12 months or less (but not beyond the date that is five Business Days prior to the Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least 30 days prior to the then-applicable expiry date that such Letter of Credit will not be renewed.

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(d) Participation . By the issuance of a Letter of Credit and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each such Lender hereby acquires from the applicable Issuing Bank, a participation in such Letter of Credit equal to such Lender’s Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender’s Applicable Percentage of each L/C Disbursement made by the Issuing Bank and not reimbursed by the Trustee or El Paso, as the case may be, forthwith on the date due as provided in Section 2.02(f). Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.

(e) Reimbursement . If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, the Trustee or El Paso, as the case may be, shall pay to the Administrative Agent an amount equal to such L/C disbursement not later than 4:00 p.m., New York City time on the Business Day on which the Trustee or El Paso, as the case may be, shall have received notice from the Issuing Bank that payment of such draft will be made, or, if the Trustee or El Paso, as the case may be, shall have received such notice later than 10:00 a.m., New York City time, on any Business Day, not later than 1:00 p.m., New York City time, on the immediately following Business Day. Any failure by the Trustee or El Paso, as the case may be, to make a payment under this Section 2.20(e) shall not constitute a Default or an Event of Default if the Issuing Bank shall have been reimbursed for such L/C disbursement out of the proceeds of a deemed Borrowing pursuant to Section 2.02(f).

(f) Obligations Absolute . The obligations of the Trustee or El Paso, as the case may be, to reimburse L/C Disbursements as provided in paragraph (e) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of:

(i) any lack of validity or enforceability of any Letter of Credit or any other Transaction Document, or any term or provision therein;

(ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit or any other Transaction Document;

(iii) the existence of any claim, setoff, defense or other right that the Trustee, El Paso or any other party guaranteeing, or otherwise obligated with, the Trustee or El Paso, as the case may be, any Subsidiary or other Affiliate thereof or any other person may at any time have against the beneficiary under any Letter of Credit, the Issuing Bank, the Administrative Agent or any Lender or any other person, whether in connection with this Agreement, any other Transaction Document or any other related or unrelated agreement or transaction;

(iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

(v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and

(vi) any other act or omission to act or delay of any kind of the Issuing Bank, the Lenders, the Administrative Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions

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of this Section 2.20, constitute a legal or equitable discharge of the obligations of the Trustee or El Paso, as the case may be, hereunder.

Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Trustee or El Paso, as the case may be, hereunder to reimburse L/C Disbursements will not be excused by the gross negligence or willful misconduct of the Issuing Bank. However, the foregoing shall not be construed to excuse the Issuing Bank from liability to the Trustee or El Paso, as the case may be, to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Trustee or El Paso, as the case may be, to the extent permitted by applicable law) suffered by the Trustee or El Paso, as the case may be, that are caused by the Issuing Bank’s gross negligence or willful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof; it is understood that the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) the Issuing Bank’s exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute willful misconduct or gross negligence of the Issuing Bank.

(g) Disbursement Procedures . The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall as promptly as possible give telephonic notification, confirmed by telecopy, to the Administrative Agent and the Trustee or El Paso, as the case may be, of such demand for payment and whether the Issuing Bank has made or will make an L/C Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Trustee or El Paso, as the case may be, of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such L/C Disbursement. The Administrative Agent shall promptly give each Lender notice thereof.

(h) Interim Interest . If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, then, unless the Trustee or El Paso, as the case may be, shall reimburse such L/C Disbursement in full on such date, the unpaid amount thereof shall bear interest for the account of the Issuing Bank, for each day from and including the date of such L/C Disbursement, to but excluding the earlier of the date of payment by the Trustee or El Paso, as the case may be, or the date on which the Issuing Bank is reimbursed by the Lenders pursuant to Section 2.02(f), at the rate per annum that would apply to such amount if such amount were an ABR Loan.

(i) Resignation or Removal of the Issuing Bank . The Issuing Bank may resign at any time by giving 180 days’ prior written notice to the Administrative Agent, the Lenders and the Borrowers, and may be removed at any time by the Borrowers by notice to the Issuing Bank, the Administrative Agent and the Lenders. Subject to the next succeeding paragraph, upon the acceptance of any appointment as the Issuing Bank hereunder by a Lender that shall agree to serve as successor Issuing Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be discharged from its obligations to issue additional Letters of Credit hereunder. At the time such removal or resignation shall become effective, the Borrowers shall pay all accrued and unpaid fees pursuant to Section 2.05(c)(ii). The acceptance of any appointment as the Issuing Bank hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrowers and the Administrative Agent, and, from and after the effective date of such agreement, (i) such

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successor Lender shall have all the rights and obligations of the previous Issuing Bank under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term “Issuing Bank” shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the resignation or removal of the Issuing Bank hereunder, the retiring Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit.

(j) Cash Collateralization . If any Event of Default shall occur and be continuing or the Trust Termination Date shall occur, the Trustee or El Paso, as the case may be, shall, on the Business Day it receives notice from the Administrative Agent or the Required Lenders thereof and of the amount to be deposited, deposit in an account with the Collateral Agent, for the benefit of the Lenders, an amount in cash equal to the Trustee L/C Exposure or the El Paso L/C Exposure, as the case may be, as of such date. Such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of the Collateral Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be transferred to the Administrative Agent and be applied by the Administrative Agent to reimburse the Issuing Bank for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the Trustee or El Paso, as the case may be, for the Trustee L/C Exposure or the El Paso L/C Exposure, as the case may be, at such time and (iii) if the maturity of the Loans has been accelerated, be transferred to the Administrative Agent and be applied to satisfy the Obligations (of both the Trustee and El Paso). If the Trustee or El Paso, as the case may be, is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, (x) such amount (to the extent not applied as aforesaid) shall be returned to the Trustee or El Paso, as the case may be, within three Business Days after all Events of Default have been cured or waived and (y) at any time that the amount of such cash collateral exceeds the Trustee L/C Exposure or El Paso L/C Exposure, as the case may be, the amount of such excess shall be promptly returned to the Trustee or El Paso, as the case may be.

S ECTION 2.21. Extension of Maturity Date . (a) At least 60 days but not more than 180 days before the Maturity Date, the Borrowers may, by giving written notice to the Administrative Agent, request the Lenders to extend the Maturity Date for a period of not more than one year from the then-applicable Maturity Date, specifying the terms and conditions, including applicable fees, to be applicable to such extension (each such request, an “ Extension Request ”). The Administrative Agent shall promptly furnish a copy of the Extension Request to each Lender, and no later than 30 days from the date on which the Administrative Agent shall have received such Extension Request, the Administrative Agent shall notify the Borrowers of the consent or non-consent of the Lenders to such Extension Request (and Lenders not responding to such Extension Request within such 30-day period shall be deemed not to have consented to such Extension Request). No Extension Request shall be effective without the consent of all the Lenders, and each Lender shall, in its sole and exclusive discretion, determine whether to give such consent. The Lenders’ consent to an Extension Request shall be conditional upon (i) the preparation, execution and delivery of legal documentation in form and substance satisfactory to the Lenders and their counsel incorporating the terms and conditions set forth in the Extension Request (as the same may be modified by agreement between the Borrowers and the Lenders) and (ii) the delivery by the Borrowers of such certificates, documents and opinions of counsel as the Administrative Agent or the Lenders may reasonably request. Notwithstanding anything to the contrary contained herein, the Maturity Date may be extended pursuant to this Section 2.21 for a maximum of two additional one-year periods.

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ARTICLE III

R EPRESENTATIONS AND W ARRANTIES

Each of El Paso and, subject to Section 11.19, the Trustee represents and warrants to the Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders that as of the Restatement Closing Date and thereafter on each date as required by Section 4.01(b):

S ECTION 3.01. Organization; Powers . (a) El Paso and each of the Subsidiaries (i) is duly organized, validly existing and in good standing under the laws of the state of its organization, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (iii) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect, and (iv) has the corporate power and authority to execute, deliver and perform its obligations under each of the Transaction Documents to which it is or will be a party and each other agreement or instrument contemplated hereby to which it is or will be a party and to borrow hereunder.

(b) JPMorgan is a banking corporation duly incorporated, validly existing and in good standing under the laws of the State of New York, and in its capacity as Trustee, (i) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted and (ii) has all requisite power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated hereby to which it is or will be a party and to borrow hereunder.

S ECTION 3.02. Authorization . (a) The execution, delivery and performance by it and each of its Subsidiaries (as applicable) of each of the Transaction Documents, the Trust Agreement, the Purchase Contract and the Assigned Agreements to which it is or will be a party and (b) the Borrowings by it hereunder, the issuance of Letters of Credit, the use by it of the proceeds of the Loans and the Letters of Credit and the creation of the security interests contemplated hereby and by the other Transaction Documents (collectively, the “ Transactions ”), (x) have been duly authorized by all requisite corporate, trust and, if required, stockholder action and (y) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the articles of incorporation or other constitutive documents or by-laws of El Paso or any of its Subsidiaries or of the Trust Agreement, as applicable, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which it is a party or by which it or any of its property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by it (other than any Lien created hereunder, under any Loan Document or under the Indenture).

S ECTION 3.03. Enforceability . Each of the Transaction Documents has been duly executed and delivered by it and constitutes its legal, valid and binding obligation enforceable against it in accordance with such document’s terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

S ECTION 3.04. Governmental Approvals . Except as set forth on Schedule 3.04, (i) no action, consent or approval of, registration or filing with or any other action by, any Governmental Authority is or will be required in connection with the Transactions, except for such as have been made or obtained, are in full force and effect and are not subject to any appeal or stay and (ii) no action, consent or approval of, registration or filing with or any other action by any Governmental Authority relating to the Securities Act, the Securities Exchange Act, the Trust Indenture Act, the

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Federal Power Act, the Atomic Energy Act, the Nuclear Waste Act, the Public Utility Holding Company Act of 1935, the New Mexico Public Utility Act, the Texas Public Utility Regulatory Act, the Arizona Public Utility Act, energy or nuclear matters, public utilities, the environment, health and safety is or will be required in connection with the participation by the Administrative Agent, the Collateral Agent or any Lender in any of the transactions contemplated by this Agreement or the other Transaction Documents, except as have been made or obtained, are in full force and effect and shall not be subject to any appeal or stay.

S ECTION 3.05. Financial Statements . El Paso has heretofore furnished to the Lenders its consolidated balance sheets and related statements of operations, shareholders’ equity and cash flows (a) as of and for the fiscal year ended December 31, 2000, audited by and accompanied by the opinion of KPMG LLP, independent public accountants, and (b) as of and for the fiscal quarter and the portion of the fiscal year ended September 30, 2001, certified by a Financial Officer. Such financial statements present fairly the financial condition and results of operations and cash flows of El Paso and its consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of El Paso and its consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis (except as approved by such accountants or officer, as the case may be, and disclosed therein).

S ECTION 3.06. No Material Adverse Change . There has been no material adverse change in the business, assets, operations, prospects, condition, financial or otherwise, or material agreements of El Paso and the Subsidiaries, taken as a whole, since September 30, 2001.

S ECTION 3.07. Title to Properties; Possession Under Leases . (a) Each of El Paso and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.02.

(b) Each of El Paso and the Subsidiaries has complied with all obligations under all material leases to which it is a party and all such leases are in full force and effect. Each of El Paso and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases.

S ECTION 3.08. Subsidiaries . As of the Restatement Closing Date, El Paso has no Subsidiaries other than Mirasol and Inactive Subsidiaries.

S ECTION 3.09. Litigation; Compliance with Laws . (a) Except as set forth on Schedule 3.09, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to its knowledge, threatened against or affecting it or, in the case of El Paso, the Subsidiaries or any business, property or rights of any such person (i) that involve any Transaction Document or the Transactions or (ii) that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

(b) Except as set forth on Schedule 3.09, neither it nor, in the case of El Paso, any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect.

S ECTION 3.10. Agreements . (a) Neither it nor, in the case of El Paso, any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect.

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(b) Neither it nor, in the case of El Paso, any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect.

S ECTION 3.11. Federal Reserve Regulations . (a) Neither it nor, in the case of El Paso, any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock.

(b) No part of the proceeds of any Loan made to it or any Letter of Credit issued for its benefit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation T, U or X.

S ECTION 3.12. Investment Company Act; Public Utility Holding Company Act . Neither it nor, in the case of El Paso, any of the Subsidiaries is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

S ECTION 3.13. Use of Proceeds . It will use the proceeds of the Loans and will request the issuance of Letters of Credit only for the purposes specified in the preamble to this Agreement.

S ECTION 3.14. Tax Returns . Each of El Paso and the Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which El Paso or such Subsidiary, as applicable, shall have set aside on its books adequate reserves.

S ECTION 3.15. No Material Misstatements . The Confidential Information Memorandum, taken as a whole, does not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; provided that to the extent any part of such information was based upon or constitutes a forecast or projection, El Paso represents only that it acted in good faith and utilized reasonable assumptions and due care in the preparation of such information.

S ECTION 3.16. Employee Benefit Plans . El Paso and its ERISA Affiliates are in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in a Material Adverse Effect. Schedule B to the most recent annual report filed with the United States Internal Revenue Service with respect to each Plan is complete and accurate. Since the date of the Schedule B in effect on the Restatement Closing Date, there has been no material adverse change in the funded status of any Plan. None of El Paso or any of its ERISA Affiliates has incurred any liability as a result of a Plan termination which remains outstanding which would subject El Paso or any of its ERISA Affiliates to a liability in excess of $5,000,000.

S ECTION 3.17. Environmental Matters . Except as set forth in Schedule 3.17:

(a) The properties owned or operated by El Paso and the Subsidiaries (the “ Properties ”) do not contain any Hazardous Materials in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, Environmental Laws, which violations and liabilities, in the aggregate, could reasonably be expected to result in a Material Adverse Effect;

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(b) All Environmental Permits have been obtained and are in effect with respect to the Properties and operations of El Paso and the Subsidiaries, and the Properties and all operations of El Paso and the Subsidiaries are in compliance with all Environmental Laws and all necessary Environmental Permits, except to the extent that such non-compliance or failure to obtain any necessary permits, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect;

(c) There have been no Releases or threatened Releases at, from, under or proximate to the Properties or otherwise in connection with the operations of El Paso or the Subsidiaries, which Releases or threatened Releases, in the aggregate, could reasonably be expected to result in a Material Adverse Effect;

(d) None of El Paso and the Subsidiaries has received any notice of an Environmental Claim in connection with the Properties or the operations of El Paso or the Subsidiaries or with regard to any person whose liabilities for environmental matters El Paso or any Subsidiary has retained or assumed, in whole or in part, contractually, by operation of law or otherwise, which, in the aggregate, could reasonably be expected to result in a Material Adverse Effect, nor do El Paso or the Subsidiaries have reason to believe that any such notice will be received or is being threatened; and

(e) Hazardous Materials have not been transported from the Properties, nor have Hazardous Materials been generated, treated, stored or disposed of at, on or under any of the Properties in a manner that could reasonably be expected to give rise to liability under any Environmental Law which could reasonably be expected to result in a Material Adverse Effect, nor have El Paso or the Subsidiaries retained or assumed any liability, contractually, by operation of law or otherwise, with respect to the generation, treatment, storage or disposal of Hazardous Materials, which transportation, generation, treatment, storage or disposal, or retained or assumed liabilities, in the aggregate, could result in a Material Adverse Effect.

S ECTION 3.18. Insurance . Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by El Paso as of the Restatement Closing Date. Such insurance is in full force and effect and all premiums have been duly paid. El Paso and the Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal industry practice.

S ECTION 3.19. Security Documents . (a) In the case of El Paso, the Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement), and, when combined with the financing statements (or utility filings, as appropriate) already filed, the Security Agreement constitutes a fully perfected Lien on, and security interest in, all right, title and interest of the Trustee in such Collateral, in each case prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02.

(b) In the case of the Trustee, the Collateral is free and clear of all Trustee’s Liens and, other than pursuant to the Security Agreement, the Trustee has not granted or created a Lien on any of the Collateral.

(c) In the case of El Paso, the Indenture creates in favor of the Indenture Trustee for the ratable benefit of the holders of the First Mortgage Bonds a legal, valid and enforceable security interest in the Mortgaged Property and constitutes a fully perfected Lien on and security interest in all such Mortgaged Property.

S ECTION 3.20. Labor Matters . As of the Restatement Closing Date, there are no strikes, lockouts or slowdowns against El Paso or the Subsidiaries pending or, to the knowledge of El Paso, threatened. The hours worked by and payments made to employees of El Paso and the Subsidiaries

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have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters, except where any such violation could not reasonably be expected to result in a Material Adverse Effect. All payments due from El Paso or any Subsidiary, or for which any claim may be made against El Paso or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid in the ordinary course of business or accrued as a liability on the books of El Paso or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which El Paso is bound.

S ECTION 3.21. Solvency . As of the Restatement Closing Date, (a) the fair value of the assets of El Paso, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of El Paso will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) El Paso will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) El Paso will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Restatement Closing Date.

S ECTION 3.22. Capitalization . The authorized capital stock of El Paso consists of 100,000,000 shares of common stock, no par value (the “ Common Stock ”), and 2,000,000 shares of preferred stock, no par value. As of the Restatement Closing Date, up to 60,500,000 shares of Common Stock will be issued and outstanding. All such shares of El Paso have been duly and validly issued, and are fully paid and nonassessable. El Paso has no outstanding securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock, except for options to purchase shares of Common Stock in connection with option and other stock incentive or benefit plans for the benefit of employees, officers and directors of El Paso.

ARTICLE IV

C ONDITIONS OF L ENDING

The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder are subject to the satisfaction of the following conditions:

S ECTION 4.01. All Credit Events . On the date of each Borrowing and on the date of each issuance, amendment, renewal or extension of a Letter of Credit (each such event being called a “ Credit Event ”):

(a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 (or such notice shall have been deemed given in accordance with Section 2.03) or, in the case of the issuance, amendment, renewal or extension of a Letter of Credit, the Issuing Bank and the Administrative Agent shall have received a notice requesting the issuance, amendment, renewal or extension of such Letter of Credit as required by Section 2.20(b).

(b) Except in the case of a Borrowing that does not increase the aggregate principal amount of Loans outstanding of any Lender, the representations and warranties set forth herein and in the other Loan Documents shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date.

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(c) Each Borrower shall be in compliance with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing.

Each Credit Event shall be deemed to constitute a representation and warranty by each Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) (except as aforesaid) and (c) of this Section 4.01.

S ECTION 4.02. Restatement Closing Date . On the Restatement Closing Date:

(a) The Administrative Agent shall have received, on behalf of itself, the Lenders, the Documentation Agent, the Syndication Agent and the Issuing Bank, a favorable written opinion of (i) Davis Polk & Wardwell, counsel for El Paso, substantially to the effect set forth in Exhibit G-1, (ii) Scott, Hulse, Marshall, Feuille, Finger & Thurmond, counsel for the Trustee, substantially to the effect set forth in Exhibit G-2, (iii) Steptoe & Johnson LLP, Federal regulatory counsel for the Borrowers, substantially to the effect set forth in Exhibit G-3, (iv) each local regulatory counsel listed on Schedule 4.02(a), substantially to the effect set forth in Exhibit G-4, and (v) the General Counsel of El Paso substantially to the effect set forth in Exhibit G-5, in each case (A) dated the Restatement Closing Date, (B) addressed to the Issuing Bank, the Administrative Agent, the Collateral Agent and the Lenders, and (C) covering such other matters relating to the Loan Documents and the Transactions as the Administrative Agent shall reasonably request, and the Borrowers hereby request such counsel to deliver such opinions.

(b) The Administrative Agent shall have received (i) a certificate of the Secretary or Assistant Secretary of El Paso dated the Restatement Closing Date and certifying (A) that attached thereto is a true and complete copy of the certificate or articles of incorporation of El Paso filed with the Secretary of State of Texas on or prior to the Restatement Closing Date and as in effect on the Restatement Closing Date, (B) that attached thereto is a true and complete copy of the by-laws of El Paso as in effect on the Restatement Closing Date and at all times since a date prior to the date of the resolutions described in clause (C) below, (C) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of El Paso authorizing the execution, delivery and performance of the Transaction Documents to which El Paso is or is to be a party and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (D) that the Trust Agreement has not been modified, rescinded or amended and is in full force and effect, (E) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of El Paso; (ii) a certificate of another officer of El Paso as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (i) above; (iii) a certificate of the Secretary or Assistant Secretary of JPMorgan dated the Restatement Closing Date and certifying as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Trustee; (iv) a certificate of another officer of the Trustee as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (iii) above; and (v) such other documents as the Lenders, the Issuing Bank, the Administrative Agent or the Collateral Agent may reasonably request.

(c) The Administrative Agent shall have received a certificate, dated the Restatement Closing Date and signed by a Financial Officer of El Paso, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01.

(d) (i) The loans and other amounts outstanding or payable under the Existing Credit Agreement shall have been paid in full and (ii) the Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Restatement Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrowers hereunder or under any other Loan Document.

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(e) The Security Agreement shall have been duly executed by the Trustee and shall have been delivered to the Collateral Agent and shall be in full force and effect on such date and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create or continue in favor of the Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral (subject to any Lien expressly permitted by Section 6.02) described in such agreement shall have been delivered to the Collateral Agent.

(f) The Collateral Agent shall have received the results of a search of the Uniform Commercial Code filings (or equivalent filings) made with respect to the Borrowers in such states or other jurisdictions as it shall reasonably request, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Collateral Agent that the Liens indicated in any such financing statement (or similar document) would be permitted under Section 6.02 or have been released.

(g) The Collateral Agent shall have received a Perfection Certificate (as defined in the Security Agreement) with respect to the Trustee dated the Closing Date and duly executed by a Responsible Officer of the Trustee.

(h) (i) The First Mortgage Bonds—Collateral Series H shall have been amended pursuant to the Fourth Supplemental Indenture, (ii) the Collateral Agent shall have received a replacement First Mortgage Bond—Collateral Series H, duly executed and issued by El Paso and authenticated by the Indenture Trustee, as contemplated by the Fourth Supplemental Indenture and (iii) the Collateral Agent shall have received such certificates, documents and opinions of counsel as the Collateral Agent or the Lenders may reasonably request.

(i) All requisite Governmental Authorities shall have approved or consented to the Transactions to the extent required (and such approvals shall be in full force and effect) and there shall be no action, actual or threatened, before any Governmental Authority or arbitrator that (a) has a reasonable likelihood of restraining, preventing or imposing burdensome conditions on the Transactions or (b) could reasonably be expected to result in a Material Adverse Effect.

(j) (i) El Paso shall have outstanding no Indebtedness for borrowed money or preferred stock other than Indebtedness permitted pursuant to Section 6.01; and (ii) the Trustee shall have outstanding no Indebtedness or other obligations (contingent or otherwise) other than (A) any Loans made or Letters of Credit issued hereunder, (B) commercial paper issued pursuant to the CP Program and backed by Letters of Credit issued hereunder and (C) obligations under the Purchase Contract or the Assigned Agreements.

ARTICLE V

A FFIRMATIVE C OVENANTS

Each of El Paso and, subject to Section 11.19, the Trustee covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full (or sufficient cash collateral has been deposited with the Collateral Agent in an amount equal to the then outstanding L/C Exposure), unless the Required Lenders shall otherwise consent in writing, each of the Borrowers will, and El Paso will cause each of the Subsidiaries to:

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S ECTION 5.01. Existence; Businesses and Properties . (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence.

(b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is presently conducted and operated; comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times; except in each case where the failure to do so could not reasonably be expected to result in a Material Adverse Effect.

S ECTION 5.02. Insurance . (a) With respect to El Paso, keep its insurable properties and the insurable properties of the Trustee adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including nuclear hazard, fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance (including against nuclear energy hazards to the full limit of liability under Federal law) against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law.

(b) In the event that El Paso at any time or times shall fail to obtain or maintain any of the policies of insurance required hereby or to pay any premium in whole or part relating thereto, the Collateral Agent may, after giving written notice thereof to El Paso, without waiving or releasing any obligation or liability of El Paso hereunder or any Event of Default, in its sole discretion, obtain and maintain such policies of insurance and pay such premiums and take any other actions with respect thereto as the Collateral Agent deems advisable. All sums disbursed by the Collateral Agent in connection with this Section 5.02(b), including reasonable attorneys’ fees, costs, expenses and other charges relating thereto, shall be payable, upon demand, by El Paso to the Collateral Agent and shall be additional El Paso Obligations.

S ECTION 5.03. Obligations and Taxes . Pay its Indebtedness and other obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided , however , that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the applicable Borrower shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien.

S ECTION 5.04. Financial Statements, Reports, etc . Furnish to the Administrative Agent and each Lender:

(a) with respect to El Paso, within 120 days after the end of each fiscal year, its consolidated balance sheet and related statements of operations, stockholders’ equity and cash flows showing its financial condition as of the close of such fiscal year and the results of its operations during such year, all audited by KPMG LLP or other independent public accountants of recognized national standing and accompanied by an opinion of such accoun-

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tants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present its financial condition and results of operations in accordance with GAAP consistently applied;

(b) with respect to El Paso, within 60 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheet and related statements of operations, stockholders’ equity, and cash flows showing its financial condition as of the close of such fiscal quarter and the results of its operations during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers, as fairly presenting its financial condition and results of operations on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments;

(c) with respect to El Paso, concurrently with any delivery of financial statements under sub-paragraph (a) or (b) above, a certificate of a Financial Officer certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto;

(d) with respect to El Paso, promptly after the same become publicly available, copies of all periodic and other reports, definitive proxy statements filed by it or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed to its shareholders;

(e) with respect to the Trustee, concurrently with the delivery thereof to El Paso, copies of its periodic trust reports;

(f) with respect to El Paso, promptly after El Paso shall have received notice thereof, notice of any actual or proposed change in the debt rating of any of the First Mortgage Bonds, or any notice that El Paso or any First Mortgage Bonds shall be placed on “CreditWatch” or “WatchList” or any similar list maintained by either Rating Agency, in each case with negative implications; and

(g) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of such Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request.

S ECTION 5.05. Litigation and Other Notices . Furnish to the Administrative Agent prompt written notice of the following:

(a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto;

(b) the filing or commencement of any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against it or, in the case of El Paso, any Subsidiary that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; and

S ECTION 5.06. Employee Benefits . With respect to El Paso, (a) comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent (i) as soon as possible after, and in any event within 10 days after any Responsible Officer of El Paso or any ERISA Affiliate knows or has reason to know that, any ERISA Event has occurred

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that, alone or together with any other ERISA Event could reasonably be expected to result in liability of El Paso in an aggregate amount exceeding $5,000,000 or requiring payments exceeding $1,000,000 in any year, a statement of a Financial Officer of El Paso setting forth details as to such ERISA Event and the action, if any, that El Paso proposes to take with respect thereto.

S ECTION 5.07. Maintaining Records; Access to Properties and Inspections . Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each Borrower will, and El Paso will cause each Subsidiary to, permit any representatives designated by the Administrative Agent or any Lender to visit and inspect the financial records and the properties of such Borrower or such Subsidiary upon reasonable notice and at reasonable times and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition of such Borrower or such Subsidiary with the officers thereof and independent accountants therefor.

S ECTION 5.08. Use of Proceeds . Use the proceeds of the Loans made to it and request the issuance of Letters of Credit only for the purposes set forth in the preamble to this Agreement.

S ECTION 5.09. Compliance with Environmental Laws . With respect to El Paso, comply, and use commercially reasonable efforts to cause all lessees and other persons occupying its Properties to comply, in all material respects with all Environmental Laws and Environmental Permits applicable to its operations and Properties; obtain and renew all material Environmental Permits necessary for its operations and Properties; and conduct any Remedial Action in substantial compliance with Environmental Laws.

S ECTION 5.10. Further Assurances . Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing Uniform Commercial Code and other financing statements) that may be required under applicable law, or that the Required Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests created or intended to be created herein, by the Security Agreement or by the Indenture. El Paso shall (a) cause any Domestic Subsidiary with consolidated total assets at any time equal to or greater than 10% of El Paso’s consolidated total assets at such time to execute a guarantee of all the El Paso Obligations pursuant to a Subsidiary Guarantee Agreement and (b) cause the capital stock of any such Subsidiary referred to in clause (a) above to be pledged to the Collateral Agent for the ratable benefit of the Secured Parties to secure the El Paso Obligations pursuant to a Pledge Agreement. In furtherance of the foregoing, El Paso shall give prompt notice to the Administrative Agent of the creation, acquisition or existence of any such Subsidiary. Each Borrower agrees to provide such evidence as the Collateral Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien.

ARTICLE VI

N EGATIVE C OVENANTS

Each of El Paso and, subject to Section 11.19, the Trustee covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full (or sufficient cash collateral has been deposited with the Collateral Agent in an amount equal to the then outstanding L/C Exposure), unless the Required Lenders shall otherwise consent in writing, neither Borrower will, nor will El Paso permit any Subsidiary to:

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S ECTION 6.01. Indebtedness . Incur, create, assume or permit to exist (collectively, “ incur ”) any Indebtedness; provided , however , that El Paso may incur any Indebtedness if the Fixed Charge Coverage Ratio for El Paso’s most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred would have been at least 2.50 to 1.00 determined on a pro forma basis (including giving a pro forma effect to the incurrence thereof and the application of the net proceeds therefrom), as if such additional Indebtedness had been incurred at the beginning of such four-quarter period. Notwithstanding the foregoing, the following Indebtedness may be incurred:

(a) the First Mortgage Bonds issued and outstanding on the Restatement Closing Date, and any refinancing thereof (in whole or in part) by El Paso, provided that (i) any such refinancing Indebtedness is in an aggregate principal amount not greater than the aggregate principal amount of the First Mortgage Bonds being refinanced plus the amount of any premiums required to be paid thereon and fees and expenses associated therewith, (ii) such refinancing Indebtedness has a later or equal final maturity and a longer or equal weighted average life than the First Mortgage Bonds being refinanced, (iii) the interest rate borne by such refinancing Indebtedness shall be less than or equal to the interest rate borne by the First Mortgage Bonds being refinanced and (iv) each of the other covenants, events of default and other provisions of such refinancing Indebtedness shall be no less favorable to the Lenders and El Paso than those contained in the First Mortgage Bonds being refinanced unless each of such provisions is approved in writing by the Required Lenders;

(b) Indebtedness of El Paso existing on the Restatement Closing Date and set forth in Schedule 6.01 and any extensions, renewals, refundings or replacements of such Indebtedness, provided that any such extension, renewal, refunding or replacement is (i) in an aggregate principal amount not greater than the principal amount of such Indebtedness so extended, renewed, refunded or replaced plus the amount of accrued interest and premiums, if any, thereon and the reasonable expenses incurred in connection therewith and (ii) on terms no less favorable to the Lenders and El Paso than the terms of such Indebtedness so extended, renewed, refunded or replaced;

(c) Indebtedness under the Maricopa Reimbursement Agreement, the Farmington Reimbursement Agreement, the Maricopa Loan Agreements and the Farmington Loan Agreements, and any extensions, renewals, refundings or replacements of any such Indebtedness, provided that any such extension, renewal, refunding or replacement is in an aggregate principal amount not greater than the principal amount of such Indebtedness so extended, renewed, refunded or replaced plus (A) the amount of accrued interest and premiums, if any, thereon and the reasonable expenses incurred in connection therewith and (B) with respect to any extension, renewal, refunding or replacement of the Farmington Reimbursement Agreement or the Maricopa Reimbursement Agreement, the amount of interest coverage then required, based on the determination of a Rating Agency, to be included in such Indebtedness;

(d) Indebtedness created hereunder;

(e) Commercial paper of the Trustee issued pursuant to the CP Program in an aggregate principal amount not to exceed $70,000,000 at any time outstanding;

(f) Indebtedness of El Paso and Finsub incurred pursuant to the Receivables Program Documents;

(g) Rate Protection Agreements, in form and with parties reasonably acceptable to the Administrative Agent;

(h) Indebtedness of El Paso or any Subsidiary represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for

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the purpose of financing all or any part of the purchase price or cost of construction or improvement of property used in the business of El Paso or the Subsidiaries, and Indebtedness incurred to refinance such Capital Lease Obligations, mortgage financings or purchase money obligations, in an aggregate principal amount not to exceed, when combined with the aggregate principal amount of Capital Lease Obligations outstanding pursuant to paragraph (i) below, $25,000,000 at any time outstanding; provided that such Indebtedness shall initially be incurred within 180 days of the acquisition or construction of such property;

(i) Capital Lease Obligations incurred in connection with Sale Leaseback Transactions permitted pursuant to Section 6.03, in an aggregate principal amount not to exceed, when combined with the aggregate principal amount of Indebtedness outstanding pursuant to paragraph (h) above, $25,000,000;

(j) any other unsecured Indebtedness of El Paso or any Subsidiary in an aggregate principal amount not to exceed $10,000,000; and

(k) Indebtedness between and among El Paso and any of its Wholly Owned Subsidiaries that guarantee the Obligations.

S ECTION 6.02. Liens . Create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except:

(a) Liens on property or assets of El Paso existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof;

(b) any Lien created under the Loan Documents;

(c) any Lien existing on any property or asset prior to the acquisition thereof by El Paso or any Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition and (ii) such Lien does not apply to any other property or assets of either Borrower or any Subsidiary;

(d) Liens for taxes or assessments by any Governmental Authority not yet due or which are being contested in compliance with Section 5.03;

(e) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlords’, licensors’ or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03;

(f) pledges and deposits made in the ordinary course of El Paso’s business in compliance with workmen’s compensation, unemployment insurance and other social security laws or regulations;

(g) deposits by El Paso to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(h) zoning restrictions, easements, rights-of-way, restrictions on use of real property or permit or license requirements and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not

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materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Borrowers or any Subsidiary;

(i) purchase money security interests in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by El Paso; provided that (i) such security interests secure Indebtedness permitted by Section 6.01(b) or Section 6.01(j), (ii) the Indebtedness secured thereby does not exceed 85% of the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of the incurrence of such Indebtedness and (iii) such security interests do not apply to any other property or assets of El Paso or any Subsidiary;

(j) the Lien of the Indenture;

(k) Liens on the property of Finsub incurred pursuant to the Receivables Program Documents and Liens in favor of Finsub granted by El Paso with respect to Receivables purportedly sold to Finsub by El Paso pursuant to the Receivables Program;

(l) the Lien in favor of the Indenture Trustee created by the Indenture and securing the payment of its fees and expenses;

(m) one or more attachments or other similar Liens on assets of El Paso arising in connection with court proceedings (i) in an aggregate principal amount not in excess of $10,000,000 (so long as El Paso has set aside adequate reserves therefor) or (ii) the execution of which has been stayed or which has been appealed and secured, if necessary, by an appeal bond; provided that in each case no Event of Default shall result therefrom;

(n) any Lien arising by operation of law on the assets of El Paso in favor of any Governmental Authority with respect to any franchise, grant, license, permit or contract that affects any Mortgaged Property; and

(o) any other Liens that, in the reasonable judgment of the Required Lenders, do not individually or in the aggregate materially impair the Liens of each of the Security Agreement, this Agreement and the Indenture, or the security afforded thereby for the benefit of the Secured Parties.

S ECTION 6.03. Sale and Lease-Back Transactions . Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred (a “ Sale Lease-Back Transaction ”), except for Sale LeaseBack Transactions of real property and tangible personal property with an aggregate fair market value not to exceed $25,000,000 at any time.

S ECTION 6.04. Investments, Loans and Advances . Purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except:

(a) investments by El Paso in the capital stock of Mirasol; provided however, that the aggregate cumulative amount of El Paso’s investments in, and loans and advances to, Mirasol shall not exceed $20,000,000 (unless Mirasol shall have become a Loan Party);

(b) investments by El Paso in the capital stock of each Subsidiary (other than investments permitted by (a) above); provided however, that the aggregate cumulative amount of El Paso’s investments in, and loans and advances to, such Subsidiaries that are not Loan Parties shall not exceed $20,000,000;

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(d) Investments of El Paso existing on the Restatement Closing Date and set forth on Schedule 6.04;

(e) Investments received in connection with the bankruptcy or reorganization of customers and suppliers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; and

(f) Investments in intercompany loans permitted pursuant to Section 6.01(k).

S ECTION 6.05. Mergers, Consolidations and Sales of Assets and Acquisitions . Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or any substantial part of its assets (whether now owned or hereafter acquired) or any capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person except that (a) the Trustee may purchase and sell Nuclear Fuel in accordance with the provisions of the Purchase Contract, (b) El Paso and Finsub may sell Receivables pursuant to the Receivables Program and (c) El Paso may sell or contribute transmission assets to the extent that FERC orders such assets to be sold in connection with joining a Regional Transmission Organization.

S ECTION 6.06. Transactions with Affiliates . Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates (other than its Wholly Owned Subsidiaries), except that El Paso or any Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to El Paso or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties.

S ECTION 6.07. Businesses of Borrowers and Subsidiaries . Engage at any time in any business or business activity other than (a) with respect to El Paso and the Subsidiaries, the business conducted by them on the Restatement Closing Date and business activities reasonably incidental thereto, including in the case of Finsub the activities contemplated in the Receivables Program, and (b) with respect to the Trustee, purchasing, holding title to, making payments with respect to and selling Nuclear Fuel pursuant to, and on the terms set forth in, the Trust Agreement and the Purchase Contract.

S ECTION 6.08. Other Indebtedness and Agreements . (a) Except as expressly permitted pursuant to Section 6.01, permit any waiver, supplement, modification, amendment, termination or release of any indenture, instrument or agreement pursuant to which any Indebtedness or preferred stock of either Borrower or any Subsidiary is outstanding in an aggregate outstanding principal amount in excess of $5,000,000, to the extent that any such waiver, supplement, modification, amendment, termination or release would be adverse to the Lenders in any material respect.

(b) Permit any waiver, supplement, modification, amendment, termination or release of the Indenture to the extent that any such waiver, supplement, modification, amendment, termination or release would, in the reasonable judgment of the Required Lenders, be adverse to the interests of the Lenders in any material respect, without the consent of the Required Lenders.

(c) Permit any waiver, supplement, modification, amendment, termination or release of (i) the Trust Agreement, the Purchase Contract or the Assigned Agreements, (ii) the documents constituting the CP Program or (iii) the Receivables Program Documents, in each case to the extent that any such waiver, supplement, modification, amendment, termination or release would be adverse to the Lenders in any material respect.

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S ECTION 6.09. Release of Collateral . (a) El Paso shall not effect or seek the release of any of the Mortgaged Property from the lien of the Indenture unless such release would have been permitted by the Indenture as in effect on the Restatement Closing Date without the consent of any holder of First Mortgage Bonds.

(b) The Lenders hereby release (i) Mirasol from its obligations under the Guarantee Agreement dated as of April 27, 2001, between Mirasol and the Collateral Agent for the benefit of the Secured Parties and (ii) El Paso from its obligations under the Pledge Agreement dated as of April 27, 2001, between El Paso and the Collateral Agent for the benefit of the Secured Parties, each such release to be effective on the Restatement Closing Date.

S ECTION 6.10. Debt to Capitalization Ratio . Permit the ratio of (i) Total Consolidated Debt to (ii) Total Consolidated Capital as of the last day of any fiscal quarter to be in excess of 0.70 to 1.00.

S ECTION 6.11. Interest Coverage Ratio . Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters to be less than 2.50 to 1.00.

S ECTION 6.12. Consolidated Capital Expenditures . In the case of El Paso and the Subsidiaries, incur Consolidated Capital Expenditures in any fiscal year in an aggregate amount in excess $80,000,000.

S ECTION 6.13. Fiscal Year . Change the end of its fiscal year from December 31 to any other date.

ARTICLE VII

E VENTS OF D EFAULT

In case of the happening of any of the following events (“ Events of Default ”):

(a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings or issuances of Letters of Credit hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished;

(b) default shall be made in the payment of any principal of any Loan or the reimbursement with respect to any L/C Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise;

(c) default shall be made in the payment of any interest on any Loan or any Fee or L/C Disbursement or any other amount (other than an amount referred to in (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five Business Days;

(d) default in any material manner shall be made in the due observance or performance by either Borrower or any Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.05 or 5.08 or in Article VI;

(e) default shall be made in the due observance or performance by either Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those specified in (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to the Borrowers;

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(f) either Borrower or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $10,000,000, when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity;

(g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of either Borrower or any Subsidiary (other than an Inactive Subsidiary) or of a substantial part of the property or assets of either Borrower or any such Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for either Borrower or any Subsidiary (other than an Inactive Subsidiary) or for a substantial part of the property or assets of either Borrower or any such Subsidiary or (iii) the winding-up or liquidation of either Borrower or any Subsidiary (other than an Inactive Subsidiary); and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(h) either Borrower or any Subsidiary (other than an Inactive Subsidiary) shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for either Borrower or any such Subsidiary or for a substantial part of the property or assets of either Borrower or any such Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing;

(i) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against either Borrower or any Subsidiary and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of either Borrower or any Subsidiary to enforce any such judgment;

(j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in liability of El Paso and its ERISA Affiliates in an aggregate amount exceeding $10,000,000 or requires payments exceeding $5,000,000 in any year;

(k) any security interest purported to be created hereby or by the Security Agreement shall cease to be, or shall be asserted by either Borrower not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or the Security Agreement) security interest in the assets or properties covered thereby;

(l) there shall have occurred a Change in Control;

(m) a Purchase Contract Default shall have occurred and be continuing;

then, and in every such event (other than an event with respect to either Borrower described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the

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Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrowers, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of each Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by each Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and in any event with respect to either Borrower described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of each Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by each Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding.

ARTICLE VIII

T HE A DMINISTRATIVE A GENT AND THE C OLLATERAL A GENT

In order to expedite the transactions contemplated by this Agreement, JPMorgan is hereby appointed to act as Administrative Agent and Collateral Agent on behalf of the Lenders and the Issuing Bank (for purposes of this Article VIII, the Administrative Agent and the Collateral Agent are referred to collectively as the “ Agents ”). Each of the Lenders and each assignee of any such Lender hereby irrevocably authorizes the Agents to take such actions on behalf of such Lender or assignee or the Issuing Bank and to exercise such powers as are specifically delegated to the Agents by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders and the Issuing Bank, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders and the Issuing Bank all payments of principal of and interest on the Loans, all payments in respect of L/C Disbursements and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender or the Issuing Bank its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by either Borrower pursuant to this Agreement or the other Loan Documents as received by the Administrative Agent. Without limiting the generality of the foregoing, the Agents are hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Agreement.

Neither the Agents nor any of their respective directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or willful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by each Borrower or any other Loan Party of any of the terms, conditions, covenants or agreements contained in any Transaction Document. The Agents shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, any other Transaction Document, or any other document, instrument or agreement. The Agents shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. Each Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be

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genuine and correct and to have been signed or sent by the proper person or persons. Neither the Agents nor any of their respective directors, officers, employees or agents shall have any responsibility to either Borrower on account of the failure of or delay in performance or breach by any Lender or the Issuing Bank of any of its obligations hereunder or to any Lender or the Issuing Bank on account of the failure of or delay in performance or breach by any other Lender or the Issuing Bank or either Borrower of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. Each of the Agents may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel.

The Lenders hereby acknowledge that neither Agent shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders.

Subject to the appointment and acceptance of a successor Agent as provided below, either Agent may resign at any time by notifying the Lenders and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor reasonably satisfactory to Borrower. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. After the Agent’s resignation hereunder, the provisions of this Article and Section 11.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent.

With respect to the Loans made by it hereunder, each Agent in its individual capacity and not as Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not an Agent, and the Agents and their Affiliates may accept deposits from, lend money to and generally engage in any kind of business with either Borrower or any Subsidiary or other Affiliates thereof as if it were not an Agent.

Each Lender agrees (a) to reimburse the Agents, on demand, in the amount of its Applicable Percentage of any expenses incurred for the benefit of the Lenders by the Agents, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrowers and (b) to indemnify and hold harmless each Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against it in its capacity as Agent or any of them in any way relating to or arising out of this Agreement or any other Transaction Document or any action taken or omitted by it or any of them under this Agreement or any other Transaction Document, to the extent the same shall not have been reimbursed by the Borrowers, provided that no Lender shall be liable to an Agent or any such other indemnified person for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are determined by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Agent or any of its directors, officers, employees or agents.

Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it shall from time to time deem appropriate,

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continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder.

ARTICLE IX

G UARANTEE

As a result of the arrangements contemplated by the Trust Agreement and the Purchase Contract for the financing by the Trustee of Nuclear Fuel, El Paso acknowledges that it will derive substantial benefit from the commitments of the Lenders to make Loans to the Trustee and the commitment of the Issuing Bank to issue Letters of Credit for the account of the Trustee. To induce the Lenders to make the Loans and the Issuing Bank to issue Letters of Credit and to enter into this Agreement, El Paso agrees with each Lender, the Issuing Bank, the Administrative Agent and the Collateral Agent (each such person, together with its successors and assigns, a “ Guaranteed Party ”) as follows:

S ECTION 9.01. Guarantee . El Paso unconditionally guarantees, as a primary obligor and not merely as a surety, (a) the due and punctual payment of (i) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans made to the Trustee, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Trustee under this Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral and (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Trustee to the Guaranteed Parties under this Agreement and the other Loan Documents and (b) the due and punctual performance of all covenants, agreements, obligations and liabilities of the Trustee under or pursuant to this Agreement and the other Loan Documents (all the monetary and other obligations referred to in the preceding clauses (a) and (b) being collectively called the “ Trust Obligations ”). El Paso further agrees that the Trust Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Trust Obligation.

S ECTION 9.02. Obligations Not Waived . To the fullest extent permitted by applicable law, El Paso waives presentment to, demand of payment from and protest to the Trustee of any of the Trust Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. To the fullest extent permitted by applicable law, the obligations of El Paso hereunder shall not be affected by (a) the failure of the Collateral Agent or any other Guaranteed Party to assert any claim or demand or to enforce or exercise any right or remedy against the Trustee, (b) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of this Agreement, any other Transaction Document, any Guarantee or any other agreement, including with respect to any other guarantor of the Obligations, or (c) the failure to perfect any security interest in, or the release of, any of the security held by or on behalf of the Collateral Agent or any other Guaranteed Party.

S ECTION 9.03. Security . El Paso authorizes the Collateral Agent and each of the other Guaranteed Parties to (a) take and hold security for the payment of this guarantee and the Trust Obligations and exchange, enforce, waive and release any such security, (b) apply such security and direct the order or manner of sale thereof as they in their sole discretion may determine and (c) release or substitute any one or more endorsees, other guarantors or other obligors.

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S ECTION 9.04. Guarantee of Payment . El Paso further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by the Collateral Agent or any other Guaranteed Party to any of the security held for payment of the Trust Obligations or to any balance of any deposit account or credit on the books of the Collateral Agent or any other Guaranteed Party in favor of the Trustee or any other person.

S ECTION 9.05. No Discharge or Diminishment of Guarantee . The obligations of El Paso hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the payment in full in cash of the Trust Obligations), including any claim of waiver, release, surrender, alteration or compromise of any of the Trust Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Trust Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of El Paso hereunder shall not be discharged or impaired or otherwise affected by the failure of the Collateral Agent or any other Guaranteed Party to assert any claim or demand or to enforce any remedy under this Agreement, any other Transaction Document or any other agreement, by any waiver or modification of any provision of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Trust Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of El Paso or that would otherwise operate as a discharge of El Paso as a matter of law or equity (other than the payment in full in cash of all the Trust Obligations).

S ECTION 9.06. Defenses of the Trustee Waived . To the fullest extent permitted by applicable law, El Paso waives any defense based on or arising out of any defense of the Trustee or the unenforceability of the Trust Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Trustee, other than the payment in full in cash of the Trust Obligations. The Collateral Agent and the other Guaranteed Parties may, at their election, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Trust Obligations, make any other accommodation with the Trustee or any other guarantor or exercise any other right or remedy available to them against the Trustee or any other guarantor, without affecting or impairing in any way the liability of El Paso hereunder except to the extent the Trust Obligations have been fully, finally paid in cash. To the fullest extent permitted by applicable law, El Paso waives any defense arising out of any such election even though such election operates, pursuant to applicable law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of El Paso against the Trustee or any other guarantor, as the case may be, or any security.

S ECTION 9.07. Agreement to Pay; Subrogation . In furtherance of the foregoing and not in limitation of any other right that the Collateral Agent or any other Guaranteed Party has at law or in equity against El Paso by virtue hereof, upon the failure of the Trustee to pay any Trust Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, El Paso hereby promises to and will forthwith pay, or cause to be paid, to the Collateral Agent or such other Guaranteed Party as designated thereby in cash the amount of such unpaid Trust Obligations. Upon payment by El Paso of any sums to the Collateral Agent or any Guaranteed Party as provided above, all rights of El Paso against the Trustee arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior payment in full in cash of all the Trust Obligations. In addition, any indebtedness of the Trustee now or hereafter held by El Paso is hereby subordinated in right of payment to the prior payment in full of the Trust Obligations. If any amount shall erroneously be paid to El Paso on account of (i) such subrogation, contribution, reimbursement, indemnity or similar right or (ii) any such indebtedness of the Trustee, such amount shall be held in trust for the benefit of the Guaranteed Parties and shall forthwith be paid to the Collateral Agent to be credited against the payment of the Trust Obligations, whether matured or unmatured, in accordance with the terms of the Loan Documents.

S ECTION 9.08. Information . El Paso assumes all responsibility for being and keeping itself informed of the Trustee’s financial condition and assets, and of all other circumstances bearing upon

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the risk of nonpayment of the Trust Obligations and the nature, scope and extent of the risks that El Paso assumes and incurs hereunder, and agrees that none of the Collateral Agent or the other Guaranteed Parties will have any duty to advise El Paso of information known to it or any of them regarding such circumstances or risks.

S ECTION 9.09. Termination . The guarantee made hereunder (a) shall terminate when all the Trust Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend to the Trustee under this Agreement, the Trustee L/C Exposure has been reduced to zero and the Issuing Bank has no further obligation to issue Letters of Credit under this Agreement and (b) shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Trust Obligation is rescinded or must otherwise be restored by any Guaranteed Party or El Paso upon the bankruptcy or reorganization of the Trustee, El Paso or otherwise.

ARTICLE X

S ECURITY

S ECTION 10.01. First Mortgage Bonds . As security for the payment and performance of (i) the due and punctual payment of (A) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans made to El Paso, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (B) all monetary obligations of El Paso pursuant to the Guarantee in Article IX hereof, (C) each payment required to be made by El Paso under this Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral and (D) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of El Paso to the Administrative Agent, the Collateral Agent and the Lenders under this Agreement and the other Loan Documents and (ii) the due and punctual performance of all covenants, agreements, obligations and liabilities of El Paso under or pursuant to this Agreement and the other Loan Documents (all the monetary and other obligations referred to in the preceding clauses (i) and (ii) being collectively called the “ El Paso Obligations ”), El Paso has delivered to the Collateral Agent, for the ratable benefit of the Secured Parties, $100,000,000 principal amount of First Mortgage Bonds—Collateral Series H, duly executed and issued by El Paso and authenticated by the Indenture Trustee and entitling the Collateral Agent and the Secured Parties to the benefits of the Indenture with respect to the El Paso Obligations.

S ECTION 10.02. Application of Funds . The Collateral Agent shall remit any funds received on account of the First Mortgage Bonds—Collateral Series H to the Administrative Agent for application against the El Paso Obligations as well as any Collateral consisting of cash, as follows:

FIRST, to the payment of all costs and expenses incurred by the Administrative Agent or the Collateral Agent (in its capacity as such hereunder or under any other Loan Document) in connection with such collection or sale or otherwise in connection with this Agreement or any of the El Paso Obligations, including all court costs and the reasonable fees and expenses of its agents and legal counsel, the repayment of all advances made by the Collateral Agent or the Administrative Agent hereunder or under any other Loan Document and any other reasonable costs or expenses incurred in connection with the exercise of any right or remedy hereunder or under any other Loan Document;

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SECOND, to the payment in full of the El Paso Obligations (the amounts so applied to be distributed among the Secured Parties pro rata in accordance with the amounts of the El Paso Obligations owed to them on the date of any such distribution); and

THIRD, to El Paso, its successors or assigns, or as a court of competent jurisdiction may otherwise direct.

The Administrative Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement. To the extent that funds recovered under the First Mortgage Bonds—Collateral Series H are insufficient to pay in full the El Paso Obligations, El Paso shall remain liable under the terms of this Agreement and the other Loan Documents for any such deficiency.

S ECTION 10.03. Rights of Bondholders . The Collateral Agent, as the holder on behalf of the Secured Parties of the First Mortgage Bonds—Collateral Series H, shall have only such rights with respect thereto as provided in the Indenture.

ARTICLE XI

M ISCELLANEOUS

S ECTION 11.01. Notices . Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:

(a) if to either Borrower, to it in care of El Paso Electric Company, Kayser Bldg., 100 N. Stanton, El Paso, Texas 79901, Attention of: Kathryn Hood, Treasurer (Telecopy No. (915) 521-4728));

(b) if to the Administrative Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, New York, New York 10081, Attention of Michael Cerniglia (Telecopy No. (212) 552-5777), with a copy to JPMorgan Chase Bank, at 270 Park Avenue, New York, New York 10017, Attention of Delia Marin (Telecopy No. (212) 270-4392); and

(c) if to a Lender, to it at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto.

All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 11.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 11.01.

S ECTION 11.02. Survival of Agreement . All covenants, agreements, representations and warranties made by each Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and the Issuing Bank and shall survive the making by the Lenders of the Loans and the issuance of Letters of Credit by the Issuing Bank, regardless of any investigation made by the Lenders or the Issuing Bank or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of Credit is outstanding (for which sufficient cash collateral has not

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been deposited with the Collateral Agent) and so long as the Commitments have not been terminated. The provisions of Sections 2.12 (except as expressly limited therein), 2.14, 2.18 and 11.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Transaction Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank.

S ECTION 11.03. Binding Effect . This Agreement shall become effective when it shall have been executed by the Borrowers and the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto.

S ECTION 11.04. Successors and Assigns . (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of each Borrower, the Administrative Agent, the Issuing Bank or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns.

(b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided , however , that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, (x) each Borrower and the Administrative Agent (and, in the case of any assignment of a Commitment, the Issuing Bank) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld) and (y) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or, if less, the entire remaining amount of such Lender’s Commitment), provided further that during the continuation of an Event of Default, the consent of the Borrowers shall not be required for such assignment, (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender’s rights and obligations under this Agreement, (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (iv) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to paragraph (e) of this Section 11.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.12 (except as expressly limited therein), 2.14, 2.18 and 11.05, as well as to any Fees accrued for its account and not yet paid).

(c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, and the outstanding balance of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability,

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genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrowers or the performance or observance by either Borrower of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05 or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, the Collateral Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Collateral Agent, respectively, by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender.

(d) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive and the Borrowers, the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by each Borrower, the Issuing Bank, the Collateral Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of each Borrower, the Issuing Bank and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders and the Issuing Bank. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e).

(f) Each Lender may without the consent of the Borrowers, the Issuing Bank or the Administrative Agent sell participation interests to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided , however , that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.12, 2.14 and 2.18 to the same extent as if they were Lenders, provided , however , the right of each holder of a participation to receive payment under such sections shall be limited to the lesser of (a) the amounts actually incurred by such holder for which payment is provided under said sections and (b) the amounts that would have been payable under said sections by the applicable Borrower to the Lender granting the participation to such holder had such participation not been granted, and (iv) the Borrowers, the Administrative Agent, the Issuing Bank and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans or L/C Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing

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any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans or increasing or extending the Commitments).

(g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers; provided that, prior to any such disclosure of information designated by the Borrowers as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 11.16.

(h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, each Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to such Borrower by the assigning Lender hereunder.

(i) Neither Borrower shall assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent, the Issuing Bank and each Lender, and any attempted assignment without such consent shall be null and void.

(j) In the event that S&P, Moody’s and Thompson’s BankWatch (or InsuranceWatch Ratings Service, in the case of Lenders that are insurance companies (or Best’s Insurance Reports, if such insurance company is not rated by Insurance Watch Ratings Service)) shall, after the date that any Lender becomes a Lender, downgrade the long-term certificate of deposit ratings of such Lender, and the resulting ratings shall be below BBB-, Baa3 and C (or BB, in the case of a Lender that is an insurance company (or B, in the case of an insurance company not rated by InsuranceWatch Ratings Service)), then the Issuing Bank shall have the right, but not the obligation, at its own expense, upon notice to such Lender and the Administrative Agent, to replace (or to request the Borrowers to use their reasonable efforts to replace) such Lender with an assignee (in accordance with and subject to the restrictions contained in paragraph (b) above), and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in paragraph (b) above) all its interests, rights and obligations in respect of its Commitment to such assignee; provided , however , that (i) no such assignment shall conflict with any law, rule and regulation or order of any Governmental Authority and (ii) the Issuing Bank or such assignee, as the case may be, shall pay to such Lender in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by such Lender hereunder and all other amounts accrued for such Lender’s account or owed to it hereunder.

S ECTION 11.05. Expenses; Indemnity . (a) Each Borrower jointly and severally agrees to pay all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Collateral Agent and the Issuing Bank in connection with the syndication of the credit facilities provided for herein and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or Letters of Credit issued hereunder, including the reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the reasonable

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fees, charges and disbursements of any other counsel for the Administrative Agent, the Collateral Agent or any Lender.

(b) Each Borrower jointly and severally agrees to indemnify the Administrative Agent, the Collateral Agent, each Lender and the Issuing Bank, each Affiliate of any of the foregoing persons and each of their respective directors, officers, employees and agents (each such person being called an “ Indemnitee ”) against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, (iv) any actual or alleged presence or Release of Hazardous Materials on any property owned or operated by either Borrower or any Subsidiary, or any Environmental Claim related in any way to either Borrower or any Subsidiary or (v) any strict liability or liability without fault or other liability of an owner or vendor relating in any way to the Nuclear Fuel, whether arising out of statute, judicial decision or otherwise; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee.

(c) The provisions of this Section 11.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Transaction Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank. All amounts due under this Section 11.05 shall be payable on written demand therefor.

S ECTION 11.06. Right of Setoff . If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the extent not prohibited by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of either Borrower against any of and all the Obligations now or hereafter existing under this Agreement and the other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 11.06 are in addition to other rights and remedies (including other rights of setoff) which such Lender may have.

S ECTION 11.07. Applicable Law . THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN LETTERS OF CREDIT) SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS MOST RECENTLY PUBLISHED AND IN EFFECT, ON THE DATE SUCH LETTER OF CREDIT WAS ISSUED, BY THE INTERNATIONAL CHAMBER OF COMMERCE (THE “UNIFORM CUSTOMS”) AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK.

SECTION 11.08. Waivers; Amendment . (a) No failure or delay of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank in exercising any power or right

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hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by either Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrowers in any case shall entitle either Borrower to any other or further notice or demand in similar or other circumstances.

(b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; provided , however , that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any date for reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of each Lender affected thereby, (ii) increase or extend the Commitment of any Lender without the prior written consent of such Lender, (iii) decrease the Commitment Fees or L/C Participation Fees of any Lender, or extend the date of payment of such fees, without the prior written consent of such Lender or (iv) amend or modify the pro rata sharing requirements of Section 2.15, the provisions of this Section 11.08 or Section 11.04(i), the definition of the term “Required Lenders”, release El Paso from its guarantee hereunder, release any Subsidiary from any guarantee of the El Paso Obligations, or release all or substantially all of the Collateral, without the prior written consent of each Lender; provided further , however , that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Collateral Agent or the Issuing Bank hereunder or under any other Loan Document without the prior written consent of the Administrative Agent, the Collateral Agent or the Issuing Bank, respectively.

S ECTION 11.09. Interest Rate Limitation . Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan or L/C Disbursement, together with all fees, charges and other amounts which are treated as interest on such Loan or L/C Disbursement under applicable law (collectively the “ Charges ”), shall exceed the maximum lawful rate (the “ Maximum Rate ”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or the Issuing Bank in accordance with applicable law, the rate of interest payable in respect of such Loan or L/C Disbursement hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or L/C Disbursement but were not payable as a result of the operation of this Section 11.09 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or L/C Disbursements or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender; provided that at any time Texas law shall establish the Maximum Rate, the Maximum Rate shall be the “indicated rate ceiling” (as defined in Chapter One of the Texas Credit Code, V.T.C.S. Art. 5069-1.04 et seq.) as in effect from time to time.

S ECTION 11.10. Entire Agreement . THIS AGREEMENT, THE FEE LETTER AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE CONTRACT BETWEEN THE PARTIES RELATIVE TO THE SUBJECT MATTER HEREOF. ANY OTHER PREVIOUS AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF IS SUPERSEDED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. NOTHING IN THIS AGREEMENT OR IN THE OTHER LOAN DOCUMENTS, EXPRESSED OR IMPLIED, IS INTENDED TO CONFER UPON ANY PARTY OTHER THAN THE PARTIES HERETO AND THERETO ANY RIGHTS,

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REMEDIES, OBLIGATIONS OR LIABILITIES UNDER OR BY REASON OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.

SECTION 11.11. Waiver of Jury Trial . EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.11.

S ECTION 11.12. Severability . In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

S ECTION 11.13. Counterparts . This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 11.03. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement.

S ECTION 11.14. Headings . Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement.

S ECTION 11.15. Jurisdiction; Consent to Service of Process . (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against either Borrower or its respective properties in the courts of any jurisdiction.

(b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

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(c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 11.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

S ECTION 11.16. Confidentiality . The Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders agrees to keep confidential (and to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other materials based thereon, except that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender shall be permitted to disclose Information (a) to such of its respective officers, directors, employees, agents, affiliates and representatives as need to know such Information, (b) to the extent requested by any regulatory authority, (c) to the extent otherwise required by applicable laws and regulations or by any subpoena or similar legal process, (d) in connection with any suit, action or proceeding relating to the enforcement of its rights hereunder or under the other Loan Documents, (e) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 11.16 or (ii) becomes available to the Administrative Agent, the Issuing Bank, any Lender or the Collateral Agent on a nonconfidential basis from a source other than the Borrowers, or (f) to the extent permitted by Section 11.04(g). For the purposes of this Section 11.16 , “ Information ” shall mean all financial statements, certificates, reports, agreements and information (including all analyses, compilations and studies prepared by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender based on any of the foregoing) that are received from the Borrowers and related to the Borrowers, any shareholder of El Paso or any employee, customer or supplier of either Borrower, other than any of the foregoing that were available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure thereto by either Borrower, and which are in the case of Information provided after the date hereof, clearly identified at the time of delivery as confidential. The provisions of this Section 11.16 shall remain operative and in full force and effect regardless of the expiration and term of this Agreement.

S ECTION 11.17. Texas Revolving Credit Statute . If, notwithstanding the provisions of Section 11.07, Texas law shall be applied by any Governmental Authority to this Agreement, the other Loan Documents or the obligations of either Borrower hereunder or thereunder, each Borrower hereby agrees that, pursuant to Tex. Rev. Civ. Stat. Ann. art. 5069-15.10(b), Chapter 15 of Title 79 of the Revised Civil Statutes of Texas, as amended, shall not govern or in any manner apply to its obligations hereunder or thereunder.

S ECTION 11.18. No Recourse; Multiple Capacities . (a) Wherever in this Agreement or the other Loan Documents JPMorgan has undertaken any obligations in its capacity as Trustee, it has done so solely in such capacity and not in its individual capacity. JPMorgan shall not be liable for the obligations or liabilities of the Trustee hereunder or under any other Loan Document, except to the extent such obligations or liabilities result from JPMorgan’s gross negligence or willful misconduct.

(b) Each party to this Agreement (i) acknowledges that JPMorgan, in addition to acting in its capacity as Trustee, will be party to the Loan Documents in various other capacities, including in its capacity as Administrative Agent, Collateral Agent, Issuing Bank and a Lender, (ii) hereby consents to JPMorgan’s acting in such capacities and (iii) hereby waives any claim of fiduciary duty or conflict of interest arising out of or relating to JPMorgan’s serving in such other capacities.

S ECTION 11.19. Limited Representations, Warranties and Covenants of Trustee. With respect to representations and warranties contained in Article III, the affirmative covenants contained in Article V and the negative covenants contained in Article VI, it is understood and agreed that (a) the Trustee has made no independent inquiry as to (i) the assets placed in trust into the Rio Grande Resources Trust II, (ii) any facts concerning El Paso and the Subsidiaries or as to the status or condition of any of their assets or any disclosures made by them or (iii) the existence of any Liens on the Collateral in existence before the Trustee became or becomes the owner of such property pursuant to the Purchase Contract and (b) the Trustee’s representations, warranties and

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covenants are limited to itself and those matters within its control. The Trustee has no actual knowledge of any facts that would indicate that any such representations or warranties by El Paso or the Subsidiaries are untrue.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

PASO ELECTRIC COMPANY,


By:		/s/ T ERRY D. B ASSHAM
		Name: Terry D. Bassham Title: Executive Vice President, Chief Financial & Administrative Officer

JPM

ORGAN CHASE BANK, not in its individual capacity, but solely in its capacity as Trustee,


By:		/s/
		Name: Title:

MORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank,


By:		/s/
		Name: Title:

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

PASO ELECTRIC COMPANY,


By:		/s/
		Name: Title:

JPM

ORGAN CHASE BANK, not in its individual capacity, but solely in its capacity as Trustee,


By:		/s/ S ARAH W ILSON
		Name: Sarah Wilson Title: Vice President

MORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank,


By:		/s/
		Name: Title:

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

PASO ELECTRIC COMPANY,


By:		/s/
		Name: Title:

JPM

ORGAN CHASE BANK, not in its individual capacity, but solely in its capacity as Trustee,


By:		/s/
		Name: Title:

MORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent and Issuing Bank,


By:		/s/ P ETER M. L ING
		Name: Peter M. Ling Title: Vice President

C-64

SIG

NATURE PAGE TO THE

PASO ELECTRIC COMPANY

EDIT AGREEMENT

NDER: UNION BANK OF CALIFORNIA


By:		/s/ D ENNIS G. B LANK
		Name: Dennis G. Blank Title: Vice President

C-65

SIG

NATURE PAGE TO THE

PASO ELECTRIC COMPANY

EDIT AGREEMENT

NDER: BANK OF COMMUNICATIONS, New York Branch


By:		/s/ D E C AI L I
		Name: De Cai Li Title: General Manager

C-66

SIG

NATURE PAGE TO THE

PASO ELECTRIC COMPANY

EDIT AGREEMENT

NDER: BARCLAYS BANK PLC


By:		/s/ S YDNEY G. D ENNIS
		Name: Sydney G. Dennis Title: Director

C-67

SIG

NATURE PAGE TO THE

PASO ELECTRIC COMPANY

EDIT AGREEMENT

NDER: GUARANTY FEDERAL


By:		/s/ S COTT L. B REWER
		Name: Scott L. Brewer Title: Vice President

C-68

SIG

NATURE PAGE TO THE

PASO ELECTRIC COMPANY

EDIT AGREEMENT

NDER: THE NORINCHUKIN BANK, NEW YORK BRANCH


By:		/s/ F UMIAKI O NO
		Name: Fumiaki Ono Title: General Manager

C-69

SIG

NATURE PAGE TO THE

PASO ELECTRIC COMPANY

EDIT AGREEMENT

NDER: BANK HAPOALIM, B.M.


By:		/s/ J AMES P. S URLESS / S / C ONRAD W AGNER
		Name: James P. Surless Conrad Wagner Title: Vice President First Vice President

C-70

EXHIBIT 23.01

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors

El Paso Electric Company:

We consent to incorporation by reference in the registration statements (Nos. 333–17971 and 333-82129) on Form S-8 of El Paso Electric Company of our report dated March 11, 2002, relating to the consolidated balance sheets of El Paso Electric Company and subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of operations, comprehensive operations, changes in common stock equity, and cash flows for the years ended December 31, 2001, 2000 and 1999, which report appears in the December 31, 2001 annual report on Form 10-K of El Paso Electric Company.

MG LLP

El Paso, Texas

March 25, 2002

Exhibit 24.02

EL PASO ELECTRIC COMPANY

CERTIFICATE OF RESOLUTION

I, Guillermo Silva, Jr., Secretary of El Paso Electric Company, a Texas corporation (the “Company”), do hereby certify that attached hereto is a true, correct and complete copy of the resolution authorizing signatures pursuant to the Power of Attorney for the 2001 Form 10-K, duly adopted by the Board of Directors of the Company at a meeting of said Board duly convened and held on February 7, 2002.

IN WITNESS WHEREOF , I have set my hand and have affixed the seal of the Company on this 14th day of March, 2002.



/s/ GUILLERMO SILVA, JR.
Guillermo Silva, Jr.
Secretary

(Corporate Seal)

EL PASO ELECTRIC COMPANY

RESOLUTION TO THE BOARD OF DIRECTORS

FEBRUARY 7, 2002

FURTHER RESOLVED, that Gary R. Hedrick, J. Frank Bates, Terry Bassham, Raul A. Carillo, Jr. and Guillermo Silva, Jr. are each hereby duly appointed the Company’s, and its Officer’s and Directors’, true and lawful attorneys-in-fact and agents, for its place and stead, in any and all capacities, with full power to act alone, to sign the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 Form 10-K”) and in any and all amendments thereto, and to file such 2001 Form 10-K and each such amendment, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto each of the said attorneys-in-fact and agents, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

IN THE MATTER OF THE APPLICATION OF EL PASO ELECTRIC COMPANY FOR CHANGES TO ITS RATES AND CHARGES PURSUANT TO NMPRC RULE 530 AND RULE 550,

EL PASO ELECTRIC COMPANY,

Applicant.

Utility Case No. 3606

FINAL ORDER

THIS MATTER comes before the New Mexico Public Regulation Commission (“Commission” or “NMPRC”) upon the Certification of Stipulation issued by Hearing Examiner Michael Barlow in this matter on October 23, 2001, and upon the Stipulation filed on June 6, 2001 , by El Paso Electric Company (“EPE”), the Attorney General of New Mexico (“AG”) the New Mexico Industrial Energy Consumers (“NMIEC”), the Department of Defense and the New Mexico Public Regulation Commission Utility Division Staff. The Commission, having considered the Stipulation and the record in this case and being fully apprised in the premises, adopts the following as its Order.

Statement of the Case

We accept and adopt the Hearing Examiner’s Statement of the Case as of the time he issued his Certification of Stipulation. Exceptions to his Certification were filed on November l, 2001. by the Attorney General and on November 2, 2001, by EPE and NMJEC.

Discussion

We accept and adopt the Hearing Examiner’s Discussion except as inconsistent with, supplemented or modified by this Order The Stipulation reinstates a Fuel arid Purchased Power Cost Adjustment Clause (“FPPCAC”) for a two-year period and freezes EPE’s base rates for the

same period. The two-year FPPCAC is subject to adjustment every six months and is subject to reconciliation at the end of the two-year period. Also, at the end of the two-year period, the FPPCAC fixed factor will end and be replaced with a fixed amount equal to the average fuel cost during the previous six months, and will continue through the pendency of EPE’s general rate case that must be filed at the end of the two-year period.

Paragraph 4(D) of the Stipulation provides that “fuel and purchased power collections following the two-year period, during the pendency of the rate case proceeding, shall not be subject to reconciliation.” Because the Hearing Examiner found that reconciliation for over-and under-collections is an important component of the FPPCAC process, he recommended that the Commission should reject the final sentence of paragraph 4(D) and require EPE to file with its rate case its proposal for the reconciliation process and that the matter of reconciliation should be “reserved for a determination in the rate case.” Certification of Stipulation, p. 14.

In its Exceptions EPE pointed out that its witness, Mr. Hedrick, testified that terminating the fuel clause and eliminating reconciliation after the two-year period was the product of negotiations and reflected the desire of parties who wanted a situation where you basically just have base rates and no adjustable fuel factor. Staff Witness Potturi testified in support of Paragraph 4(D), stating that the non-reconciliation fixed fuel factor established at the end of the two-year period was reasonable and appropriate. Mr. Poturri testified that the risk of over or under recovery was relatively small and applied equally to EPE and ratepayers.

In their Exceptions, NMIEC and the AG took the same position as EPE that the Commission should disapprove the portion of the Certification of Stipulation which deletes the last sentence of Paragraph 4(D) of the Stipulation, and adopt and approve the Stipulation as submitted by the Signatories.

Final Order

Utility Case No. 3606

EPE and NMIEC stated that it is in the public interest to adopt the Stipulation without modification because the Stipulation provides specific benefits to EPE’s customers. NMIEC also points out that there is no record in this Case to modify the Stipulation and that doing so would expose customers “to a likely 9 additional months of fuel cost risk.” NMIBC Exceptions, p.2.

We find the Exceptions filed by the parties unconvincing. Accordingly, we accept the Hearing Examiner’s Certification as he proposed. The Stipulation is approved and the last sentence of paragraph 4(D) is deleted as recommended by the Hearing Examiner.

THE COMMISSION FINDS AND CONCLUDES:

1. The Certification of Stipulation of the Hearing Examiner, attached to this Order as Exhibit I , and the Stipulation attached to the Certification as Attachment A, and all findings and conclusions contained in either, whether or not numbered, are ADOPTED, APPROVED and ACCEPTED as Findings and Conclusions of the Commission.

2. The Stipulation is just, reasonable and not inconsistent with the public interest and should be approved, as provided in this Order.

IT IS THEREFORE ORDERED:

A. The Orders recommended by the Hearing Examiner as set forth in the Certification of Stipulation attached hereto as Exhibit 1 are incorporated by reference as if fully set forth herein and are hereby ADOPTED, APPROVED and ACCEPTED as Orders of the Commission.

B. This Order is effective immediately.

Final Order

Utility Case No. 3606

C. A copy of this Order shall be served upon Commission Staff and all parties to this case or their counsel.

D. This Docket is closed.

ISSUED under the Seal of the Commission at Santa Fe, New Mexico this 8 ^th day of January, 2002.

[SEAL]


		OPPOSED /s/ TONY SCHAEFER
		TONY SCHAEFER, CHAIRMAN

		/s/ LYNDA M. LOVEJOY
		LYNDA M. LOVEJOY, VICE CHAIRWOMAN

		/s/ HERB H. HUGHES
		HERB H. HUGHES, COMMISSIONER

		/s/ RORY MCMINN
		RORY McMINN, COMMISSIONER

		EXCUSED
		JEROME D. BLOCK, COMMISSIONER

Final Order

Utility Case No. 3606