El Paso Electric Company DEF 14A 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
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Filed by a Party other than the Registrant ¨
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El Paso Electric Company
(Name of Registrant as Specified In Its Charter)
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EL PASO ELECTRIC COMPANY
100 N. Stanton
El Paso, Texas 79901
March 28, 2008
The Annual Meeting of Shareholders of El Paso Electric Company will be held at the Stanton Tower Building, located at 100 N. Stanton, El Paso, Texas 79901, on Wednesday, May 7, 2008, at 10:00 a.m., Mountain Daylight Time.
The purpose of the Annual Meeting is to give shareholders an opportunity (i) to vote on the election of Class II Directors; and (ii) to consider and act upon the recommendation of the Board of Directors to ratify the selection of KPMG LLP as the El Paso Electric Companys independent registered public accounting firm for the fiscal year ending December 31, 2008.
Information concerning these matters is set forth in the accompanying Notice of the meeting and Proxy Statement. Your Board of Directors recommends that you vote FOR the proposals as explained in the attached Proxy Statement.
Your vote is important. To ensure your representation, even if you cannot attend the Annual Meeting, please mark, sign, date and return promptly the enclosed proxy.
J. Frank Bates
Interim President and Chief Executive Officer
EL PASO ELECTRIC COMPANY
100 N. Stanton
El Paso, Texas 79901
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of
El Paso Electric Company:
The Annual Meeting of Shareholders of El Paso Electric Company will be held at the Stanton Tower Building, located at 100 N. Stanton, El Paso, Texas 79901, on Wednesday, May 7, 2008, at 10:00 a.m., Mountain Daylight Time, for the following purposes:
The Board of Directors knows of no matter, other than those set forth in the paragraphs above (which are discussed at greater length in the accompanying Proxy Statement), that will be presented for consideration at the Annual Meeting.
The Board of Directors has fixed the close of business on March 10, 2008, as the record date for the determination of shareholders entitled to vote at the Annual Meeting.
Under new Securities and Exchange Commission rules, the Board of Directors has made these materials available to you on the Internet or, upon your request, has delivered printed versions of these materials to you by mail, in connection with the Boards solicitation of proxies for use at the Annual Meeting. Shareholders are invited to attend the Annual Meeting and requested to vote on the proposals described in this Proxy Statement.
As owners of the El Paso Electric Company, your vote is important. Whether or not you are able to attend the Annual Meeting in person, it is important that your shares be represented. Please vote as soon as possible. If you attend the meeting and decide to vote in person, you may revoke your proxy. Shareholders attending the meeting whose shares are registered in the name of a broker and who intend to vote in person should bring an affidavit of ownership from the broker so that beneficial ownership can be verified without delay on the meeting date.
On behalf of the Board of Directors, thank you for your participation in this important annual process.
By Order of the Board of Directors,
Guillermo Silva, Jr.
March 28, 2008
YOUR VOTE IS IMPORTANT
PLEASE MARK, DATE, SIGN AND
PROMPTLY RETURN YOUR PROXY. THANK YOU.
EL PASO ELECTRIC COMPANY
100 N. Stanton
El Paso, Texas 79901
ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 7, 2008
The accompanying proxy is solicited on behalf of the Board of Directors of El Paso Electric Company (the Company) for use at its 2008 Annual Meeting of Shareholders (the Annual Meeting) to be held on Wednesday, May 7, 2008, at 10:00 a.m., Mountain Daylight Time, at the Companys principal offices, and at any adjournment thereof. The Companys principal offices are located at the Stanton Tower Building, 100 N. Stanton, El Paso, Texas 79901.
The cost of soliciting proxies will be borne by the Company. In addition to the use of the mail, proxies may be solicited by personal interview, telephone, fax, or other electronic means by the directors, officers, employees and agents of the Company. To assist in the solicitation, the Company has engaged Georgeson Shareholder Communications, Inc. for a fee of $6,000 plus out-of-pocket expenses. The Company will also reimburse brokers, banks and other persons for reasonable expenses in forwarding the Notice to beneficial owners and forwarding printed proxy materials by mail to beneficial owners who specifically request them.
This Proxy Statement and the accompanying form of proxy are first being made available on the internet to shareholders of the Company on or about March 28, 2008.
SHARES OUTSTANDING, VOTING RIGHTS AND REVOCABILITY OF PROXIES
At the close of business on March 10, 2008, the record date for determination of the shareholders entitled to notice of and to vote at the Annual Meeting, the Company had outstanding 45,164,237 shares of its common stock (the Common Stock).
Each outstanding share of Common Stock is entitled to one vote. The holders of at least a majority of the issued and outstanding shares of Common Stock must be represented in person or by proxy at the Annual Meeting for a quorum to be present and business to be conducted. The vote of a plurality of the votes cast at the meeting is required for the election of each Class II Director. The affirmative vote of the holders of a majority of the shares of Common Stock entitled to vote and represented in person or by proxy at the meeting is required to approve the selection of KPMG LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2008.
A shareholder having the right to vote may vote either in person or by proxy. A shareholder of record may vote in person at the Annual Meeting. A shareholder of record may vote by proxy over the Internet by following the instructions provided in the Notice, or if the shareholder requests printed copies of the proxy materials by mail, the shareholder may also vote by mail or by telephone.
A shareholder who signs and returns a proxy may revoke that proxy at any time before the Annual Meeting by filing with the Secretary of the Company an instrument in writing revoking the proxy, delivering a duly executed proxy bearing a later date, or attending the meeting and voting in person. The shares represented by a proxy given and not so revoked will be voted and, where the shareholder specifies a choice with respect to any matter to be acted upon and for which a ballot is provided in the proxy form, the shares will be voted in accordance with the specification so made. If a proxy is returned, but no choice is specified, the shares will be voted (i) FOR the election of the four nominees
described below as Class II Directors; and (ii) FOR the ratification of the selection of KPMG LLP as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2008. With respect to any other matters that will come before the Annual Meeting, the proxy will be voted in the discretion of the proxy holder. If no proxy is returned, the shares represented by such proxy will not be voted.
The Board of Directors is not aware of any matter that will be presented at the Annual Meeting other than as set forth in the accompanying Notice. If, however, any other matters are properly presented at the Annual Meeting, the proxy holder will have discretionary authority to vote the shares represented by properly executed proxies in accordance with the proxy holders discretion and judgment as to the best interests of the Company.
Abstentions are included in the determination of the number of shares represented at the Annual Meeting for purposes of determining whether a quorum is present and are counted as a vote AGAINST when determining whether a proposal has been approved. Broker non-votes are not included in the determination of the number of shares represented at the Annual Meeting for purposes of determining whether a quorum is present and are not counted for purposes of determining whether a proposal has been approved.
PROPOSAL 1 ELECTION OF CLASS II DIRECTORS
Article III, Section 2, of the Companys Bylaws divides the Board of Directors into three classes, as nearly equal in number as possible, each of which is elected for a three-year term. The Board currently has twelve members with Classes I, II and III containing four members each.
The shares represented by the accompanying proxy will be voted to elect four nominees for Class II Director recommended by the Board of Directors, unless authority to do so is withheld. Each nominee has agreed to the nomination and has agreed to serve if elected. Should any nominee become unavailable for election, the proxies will be voted for the election of such other person as the Board of Directors may recommend in place of such nominee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS. HEDRICK, HEITZ, PARKS AND SIEGEL AS CLASS II DIRECTORS.
Corporate Governance Guidelines
The Board has adopted Corporate Governance Guidelines (the Guidelines) that, along with the charters of the Board committees, provide the framework for the governance of the Company. The Boards Nominating and Corporate Governance Committee is responsible for overseeing and reviewing the Guidelines at least annually and recommending any proposed changes to the Board for approval. The Guidelines are available on the Companys website at www.epelectric.com. The website and its contents are not part of this Proxy Statement.
Standards of Board Independence
The Guidelines, among other things, set forth categorical standards to assist the Board of Directors in making determinations of director independence in accordance with the rules of the NYSE. The Board of Directors makes a determination regarding the independence of each director annually based on all relevant facts and circumstances. Although any director who meets the following criteria and the independence criteria of the NYSE is presumed to be independent (except for purposes of serving as a member of the Audit Committee which requires that the director meet additional requirements under SEC Rule 10A-3(b)(1)(ii)), the Board may make an affirmative determination to the contrary based on its review of other factors. Under the Guidelines, the following persons will not be considered to be independent:
In determining the independence of each non-employee director, the Board considered any transactions, relationships and arrangements in which a director may be deemed to have an interest. For 2007, the Board considered the provision of services by Irell & Manella, of which Mr. Heitz is a partner, and purchase of goods from Facilities Connection, which is owned by Ms. Holland-Branch. The Board has determined that these services were provided to us on terms typical for firms not affiliated with any directors and that the total billings for such services were not material either to us, or to Irell & Manella or Facilities Connection, and do not exceed the limits set forth in the categorical standards set forth above.
Applying these categorical standards and the independence criteria of the NYSE, the Board of Directors has determined that all of its directors meet the independence requirements of the NYSE except for Gary R. Hedrick who served as President and Chief Executive Officer of the Company until May 2007 and who receives consulting fees from the Company.
In addition, the Board of Directors has determined that all members of the Audit Committee meet the independence requirements set forth in Rule 10A-3(b)(1)(ii) under the Securities Exchange Act of 1934, as amended (the Act).
The Company has not made any charitable contributions in excess of the greater of $1 million or 2% of the charitable organizations consolidated gross revenues within the preceding three years to any charitable organization in which a director of the Company serves as an executive officer.
Business Conduct Policies
The Board of Directors has adopted a Code of Ethics that applies to all directors, officers and employees of the Company, including the Chief Executive Officer, the Executive Vice President, Chief Financial and Administrative Officer and the Controller. A current copy of the Code of Ethics may be found on the Companys internet website at www.epelectric.com. Any amendments to, or waivers from, any provision of the Code of Ethics applicable to the Companys Chief Executive Officer, Executive Vice President, Chief Financial and Administrative Officer, Controller or persons performing similar functions will be disclosed by posting such information on the Companys internet website at www.epelectric.com within five business days.
Current copies of the charters of the Audit, Compensation, and Nominating and Corporate Governance Committees (the Committee Charters) may also be found on the Companys internet website at www.epelectric.com.
Printed copies of the Guidelines, the Committee Charters and the Code of Ethics are available to any shareholder upon request. Requests for printed copies should be addressed to El Paso Electric Company, 100 N. Stanton, El Paso, Texas 79901, Attention: Office of the Secretary.
Shareholders and interested parties may correspond directly with non-management directors by writing to James W. Harris, Chairman, Nominating and Corporate Governance Committee, P.O. Box 982, El Paso, Texas 79960.
NYSE Corporate Governance Listing Standards
The Companys Chief Executive Officer must certify to the New York Stock Exchange (NYSE) each year that he is not aware of any violation by the Company of NYSE corporate governance listing standards, qualifying the certification to the extent necessary. Such certification must be made within thirty days of the date of the Companys annual shareholders meeting. The certification following the 2007 annual meeting was submitted to the NYSE timely, without qualification.
DIRECTORS MEETINGS, COMPENSATION, AND COMMITTEES
The Board of Directors held six (6) meetings during 2007. All directors attended at least 75% of the total number of meetings of the Board of Directors and the committees on which they served. The Board of Directors held six (6) executive sessions during 2007. The Chairman of the Board of Directors presides at the executive sessions.
The Company does not have a formal policy regarding director attendance at annual meetings. All members of the Board of Directors attended last years annual meeting. All members are expected to attend this years Annual Meeting.
2007 Director Compensation
The table set forth below provides information regarding compensation paid to the non-employee directors of the Company. Mr. Hedrick is excluded from the table. He remained a Director following his departure from the Company but received no additional compensation for such service.
During 2007, compensation for non-employee directors consisted of the following:
Directors are also reimbursed for travel expenses incurred in connection with their duties as directors. Non-employee directors are not eligible to participate in the executive incentive program, savings programs or any of the retirement programs for the Companys employees. Other than as described in this section, there are no separate benefit plans for directors.
The Companys Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide for indemnification of the Companys directors and officers, and the Company maintains director and officer liability insurance.
The Board of Directors has the following standing committees: Audit, Compensation, Executive, Palo Verde and Environmental Oversight, External Affairs, and Nominating and Corporate Governance.
During 2007, the Audit Committee was composed of directors Yamarone (Chairman), Brown, Cicconi, Parks and Siegel. The Audit Committee, which held sixteen (16) meetings in 2007, is responsible for appointing the independent auditors of the Company, reviewing all recommendations of the Companys independent auditors and the Companys internal auditors, reviewing and approving non-audit services performed by accountants and other consultants retained by the Company, reviewing the Companys periodic reports filed with the Securities and Exchange Commission (SEC) and otherwise overseeing the Companys financial reporting. The Audit Committee also determines whether management has established a system to promote the accuracy and completeness of the Companys financial statements and other publicly disclosed information. The roles and responsibilities of the Audit Committee are described in detail in a written charter adopted by the Board of Directors. The Board of Directors has determined that each member of the Audit Committee meets the experience and independence requirements of the NYSE rules and Rule 10A-3(b)(1)(ii) under the Act. No member of the Audit Committee serves on the audit committee of more than three public companies. The Board of Directors has determined that Messrs. Yamarone and Parks meet the criteria of audit committee financial experts under the SECs rules and are independent of management. Certain additional information concerning the composition and role of the Audit Committee is set forth under the caption Audit Committee Report below.
During 2007, the Compensation Committee was composed of directors Cicconi (Chairman), Heitz, Wertheimer and Yamarone. The Board of Directors has determined that each member of this committee is independent under the rules of the NYSE. The Compensation Committee, which held ten (10) meetings in 2007, is responsible for evaluating and approving the compensation of executive officers. It also reviews and approves recommended Company-wide compensation increases for employees, as well as approving the adoption of contracts with union employees. The Compensation Committee is also responsible for evaluating, adopting and administering benefit plan programs. The roles and responsibilities of the Compensation Committee are described in detail in a written charter adopted by the Board of Directors. Additional information concerning the process and procedures for the consideration and determination of executive compensation (including its engagement of compensation consultant Hewitt Associates (Hewitt)) by the Compensation Committee appears under the caption Compensation Discussion and Analysis below.
During 2007, the Executive Committee was composed of directors Siegel (Chairman), Harris, Hedrick (who served from January until May), Parks, Ershel C. Redd, Jr. (who served from June until December), and Wertheimer. The Executive Committee, which held ten (10) meetings in 2007, consults with senior management on administrative matters and directs the strategic planning effort on behalf of the Board. The Executive Committee may exercise all powers of the Board of Directors (except as prohibited by the Texas Business Corporation Act) between meetings. In addition, the Executive Committees responsibilities include analyzing and making recommendations to the Board of Directors regarding the maximization of shareholder value. The roles and responsibilities of the Executive Committee are described in detail in a written charter adopted by the Board of Directors.
During 2007, the External Affairs Committee was composed of directors Brown (Chairman), Guzmán, Harris, Heitz and Holland-Branch. The External Affairs Committee, which held two (2) meetings in 2007, is responsible for setting policy and reviewing an annual budget for civic and charitable contributions by the Company in the communities it serves. It is also responsible for assisting management in formulating a business development strategy for Mexico and evaluating business opportunities in Mexico. The Committee created a civic and charitable affairs subcommittee,
consisting of directors Brown, Guzmán, Hedrick, HollandBranch, and Redd (who served from June until December). This subcommittee, which held two (2) meetings in 2007, is responsible for overseeing the Companys charitable giving and civic activities. The roles and responsibilities of the External Affairs Committee are described in detail in a written charter adopted by the Board of Directors.
During 2007, the Nominating and Corporate Governance Committee was composed of directors Harris (Chairman), Parks, Siegel and Wertheimer. The Board of Directors has determined that each member of this committee is independent under the rules of the NYSE. The Nominating and Corporate Governance Committee, which held nine (9) meetings in 2007, is responsible for identifying qualified individuals to serve as members of the Board of Directors, recommending directors for appointment to committees, evaluating Board performance, and overseeing and setting compensation for the members of the Board of Directors. The roles and responsibilities of the Nominating and Corporate Governance Committee are described in detail in a written charter adopted by the Board of Directors. In 2007, the Nominating and Corporate Governance Committee assisted the Board of Directors and each of the Board committees in conducting a self-evaluation to assess their effectiveness.
During 2007, the Palo Verde and Environmental Oversight Committee was composed of directors Edwards (Chairman), Guzmán, Hedrick, Heitz, Holland-Branch, and Redd (who served from June until December). The Palo Verde and Environmental Oversight Committee, which held four (4) meetings in 2007, is responsible for (i) reviewing and assessing the activities and operations of the Palo Verde Nuclear Generating Station in which the Company is a participant and (ii) overseeing the affairs and operations of the Company to determine whether the Company has operated Company facilities in compliance with applicable environmental laws and regulations, and identifying existing and potential environmental issues facing the Company under federal, state and local law. The roles and responsibilities of the Palo Verde and Environmental Oversight Committee are described in detail in a written charter adopted by the Board of Directors.
Consideration of Director Nominees
The Nominating and Corporate Governance Committee will consider nominees for the Board of Directors submitted in writing by a shareholder. A shareholder wishing to nominate one or more individuals to stand for election as a director at an annual or special meeting of the shareholders must provide written notice thereof not less than eighty days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by the Corporation more than ninety days prior to the meeting, such notice, to be timely, must be delivered not later than the close of business on the tenth day following the day on which the date of the meeting was publicly announced. A shareholders notice must set forth (a) the name and address of the shareholder making the nomination; (b) such information regarding the nominee(s) proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee(s) been nominated by the Board of Directors; (c) a representation of the shareholder as to the number of shares of stock of the Company that are beneficially owned by the shareholder and the shareholders intent to appear in person or by proxy at the meeting to propose such nomination; and (d) the written consent of the nominee(s) to serve as a member of the Board of Directors if so elected. Any such shareholder notice should be submitted in writing to: Guillermo Silva, Jr., Corporate Secretary, El Paso Electric Company, 100 N. Stanton, El Paso, Texas 79901.
In making its recommendations regarding nominees to serve on the Board of Directors, the Nominating and Corporate Governance Committee reviews an individuals qualifications including a determination as to the independence of the candidate based on the independence criteria described above. If the nominee is being evaluated for re-nomination to the Board of Directors, the committee will assess the prior performance of such director. The committee will also periodically review the
composition of the Board of Directors in light of its current challenges and needs and determine whether it may be appropriate to add or remove individuals after considering issues of judgment, diversity, age, skills, background and experience. No director may serve on the boards of more than three other public companies while serving on the Companys Board of Directors.
The Board of Directors believes that directors should hold meaningful equity ownership positions in the Company. Each non-employee director is expected (but not required) to be a beneficial owner of shares of the Companys Common Stock or common stock equivalents with a market value equivalent to at least three years annual cash retainer fees by the end of his or her second year of service on the Board of Directors. Each non-employee director on the Board of Directors met this stock ownership guideline as of December 31, 2007.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors has selected KPMG LLP to serve as the Companys independent registered public accounting firm for the fiscal year ending December 31, 2008. At the Annual Meeting, the Company will ask shareholders to ratify the Boards selection. KPMG LLP, which served in the same capacity in 2003, 2004, 2005, 2006 and 2007, is expected to be represented at the Annual Meeting. Representatives of KPMG LLP will have an opportunity to make a statement if they desire to do so and will respond to appropriate questions. If the shareholders do not ratify the Boards proposal, the Board of Directors will reconsider its action with respect to the appointment of KPMG LLP. Approval of the resolution, however, will in no way limit the Boards authority to terminate or otherwise change the engagement of KPMG LLP during the fiscal year ending December 31, 2008.
KPMG LLP billed the Company an aggregate of $1,102,000 for professional services rendered in connection with the integrated audit of the Companys financial statements (including the Sarbanes-Oxley Section 404 certification) and review of the Companys financial statements included in the Companys quarterly reports on Form 10-Q during the fiscal year ended December 31, 2007. The integrated audit fees include $192,000 of fees associated with the December 31, 2006 audit, which were billed in 2007, and $910,000 associated with the December 31, 2007 audit.
KPMG LLP billed the Company an aggregate of $921,000 for professional services rendered in connection with the integrated audit of the Companys financial statements (including the Sarbanes-Oxley Section 404 Certification) for the fiscal year ended December 31, 2006 and review of the Companys financial statements included in the Companys quarterly reports on Form 10-Q during the fiscal year ended December 31, 2006.
Financial Information Systems Design and Implementation
The Company did not pay KPMG LLP nor did KPMG LLP perform professional services in connection with financial information systems design and implementation for the fiscal years ended December 31, 2007 and 2006.
KPMG LLP billed the Company $170,000 and $216,000 for audit-related services, including audits of benefit plans and federal and state regulatory filings, during the fiscal years ended December 31, 2007 and 2006, respectively.
KPMG LLP billed the Company $12,000 and $39,000 for professional services rendered in connection with tax compliance, tax advice and tax planning during the fiscal years ended December 31, 2007 and 2006, respectively.
All Other Fees
The Company paid no other fees to KPMG LLP during the fiscal years ended December 31, 2007 and 2006.
KPMG LLP determined that these services did not affect its independence under applicable auditing standards. The Audit Committee pre-approved the engagement of KPMG LLP to provide the
audit and permissible non-audit services described above in accordance with the requirements of the Sarbanes-Oxley Act of 2002 and determined that KPMG LLPs provision of the services described above under Audit-Related Fees, Tax Fees, and All Other Fees is compatible with KPMG LLPs independence.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee charter provides that the Audit Committee will pre-approve audit services and non-audit services to be provided by the Companys independent auditors pursuant to pre-approval policies and procedures established by the Audit Committee. The Audit Committee may consult with management in the decision-making process, but may not delegate this authority to management. The Audit Committee may delegate its authority to pre-approve services to one or more committee members, provided that such designees present any such pre-approvals to the full committee at the next committee meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF KPMG LLP AS THE COMPANYS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2008.
COMPENSATION DISCUSSION AND ANALYSIS
Executive Compensation Philosophy and Overview
Our executive compensation program is designed to:
In order to meet these goals, our executive compensation currently consists of base salary, an annual performance bonus payable in cash and stock-based long-term incentive awards, along with retirement and other benefits. The levels of compensation are determined through a combination of market data, company performance and individual responsibility and performance.
Executive Compensation Process
Our Compensation Committee (the Committee) reviews and approves compensation for all executive officers. The Committee reviews the performance of our President and Chief Executive Officer at least annually. Our CEO reviews other executive officers performance and reports his evaluations to the Committee. Our CEO also recommends to and discusses with the Committee the non-equity compensation elements for executive officers, although the Committee approves actual compensation awarded.
The Committee has engaged Hewitt, an outside global human resource consulting firm, to conduct an annual review of its total compensation program for the executive officers. Hewitt provides the Committee with relevant market data and alternatives to consider when making compensation decisions. Hewitt provides other services directly to the Company related to review, administration and adoption of employee benefit plans, for relatively small fees. The Committee believes that this engagement does not hinder Hewitts ability to give objective advice to the Committee.
The Committee generally makes decisions regarding base salary, annual bonus targets and equity incentive awards at one or more regularly scheduled meetings during February or March of each year. The Committee continues to review compensation matters throughout the year and changes or approves compensation at other times in response to hiring needs, market changes and other occurrences. The Committees decisions about equity awards are not timed or otherwise affected by the planned announcement of material information. The Company, with review by Hewitt, provides the Committee with a summary of compensation (also called a tally sheet) for each executive officer showing all compensation, equity holdings and accrued retirement benefits. We provide this information to the Committee at least annually or otherwise when material decisions are being considered by the Committee.
In consultation with Hewitt, the Committee has approved a group of companies (referred to in this discussion as the Compensation Comparator Group), which is a subset of the Edison Electric Institute Index, to be used for annual benchmarking of our compensation program. These companies represent regional electric utilities with business issues and compensation programs similar to our own. The Committee reviews compensation information of the Compensation Comparator Group compiled from surveys based on companies that participate in these surveys and publicly available data. For companies in the group with annual revenues higher or lower than ours, Hewitt adjusts the compensation market values using regression analysis to mitigate differences in size for comparison purposes, which is a commonly used approach to ensure the market values reflect our Companys size. For pay decisions made in 2007, the companies in the Compensation Comparator Group consisted of the following 16 companies:
Primary Components of Compensation
The primary components of our compensation program for the Named Executive Officers (as hereinafter defined) are:
We do not target any element of compensation to be a particular percentage of total compensation.
Base Salary. Base salary levels for our executive officers generally are reviewed and set annually. The Committee targets the 50th percentile level of the Compensation Comparator Group, although the Committee also considers executives responsibility level, experience and individual performance. The Committee most recently approved base salary increases for executive officers effective December 2007 after reviewing these factors. Base salaries for the Named Executive Officers as adjusted in 2007 on average were slightly lower than the 50th percentile as compared to the Compensation Comparator Group. The individual competitive position for the Named Executive Officers ranged from approximately 17% below the 50th percentile to 5% above the 50th percentile. These differences generally reflect each individuals experience level in the position as well as an assessment of their performance and contributions.
Annual Cash Bonus Plan. The purpose of our annual cash performance-based bonus plan is to provide market-based compensation opportunities based on achievement of specific business goals and objectives that are established in advance on an annual basis. For our executive officers, the goals are based solely on corporate financial and operational performance. For 2007, these goals were comprised of the following:
Each executive officer is assigned a target award opportunity expressed as a percentage of base salary. These targets range from 25% to 45% of base salary for most executives, and up to 65% for the CEO. The target for each of the Named Executive Officers for 2007 was as follows: (i) 65% for Mr. Redd; (ii) 40% for Mr. Bates; (iii) 45% for Mr. Wilson; (iv) 40% for Mr. Gutierrez; and (v) 30% for Mr. Sanders. The target award represents the level of bonus payment the executive may earn in the event that plan performance is achieved at targeted levels. Payments at the targeted levels are intended to approximate the 50th percentile of the Compensation Comparator Group. In addition, threshold and maximum award levels are established that adjust payouts for performance levels that exceed or fall below our plan.
The EPS bonus goals for 2007 were established based on a range between a threshold of $1.44 and a maximum of $1.64. Executives would receive no bonus if the threshold EPS goal (which is less than the target level) is not achieved and a proportionally higher bonus if earnings surpass the pre-established goal. Our target safety goals for 2007 were based on the highest performance level during the previous five years. Our customer satisfaction goals are established and measured based on annual surveys designed and performed by a third-party marketing organization and are within the top quartile of all U.S. electric utilities. Bonuses are paid in late February or early March after the Committee reviews the audited financial results and operational performance for the previous year. For the year ended December 31, 2007, the Company met its EPS goal at the maximum level, its customer satisfaction goal at target, two of its three safety goals at target and one of its three safety goals at threshold. The total bonus paid to Company employees for 2007 was approximately $7 million.
Long-Term Equity Incentives. We grant stock awards annually with a three-year payout cycle. These awards are designed to focus executives on the relative performance of our stock and, secondarily, are designed as a retention tool. Since 2004, the Committee has granted annual long-term incentives consisting of two elements:
The initial target value of each annual award is based on a weighting of approximately 75% for performance shares and 25% for time-based restricted stock. We have chosen to place more weight on the performance shares so that the most value is realized based on return for our shareholders over a period of three years. We feel the time-based restricted stock awards are also effective retention and incentive tools because their actual value is tied to the value of the Companys stock no earlier than the vesting date and require that participants be employed at the end of the three-year vesting period. The initial target values (i.e., the initial value of the time-based restricted stock plus 100% target of the performance shares) are intended to approximate the 50th percentile of the Compensation Comparator Group.
The actual number of performance shares earned at the end of the three-year cycle depends on the Companys percentile ranking within a specific group of companies identified by the Committee in consultation with Hewitt (called the Performance Comparator Group). The Performance Comparator Group is structured to be a group of companies defined by a third-party index and is somewhat different from our Compensation Comparator Group. The Performance Comparator Group currently represents 12 publicly-traded electric utilities with market capitalizations similar to our own. We believe that these companies have investor bases that are similar to ours. The following companies, chosen from the Standard & Poors SmallCap 600 Index and MidCap 400 Index that are included in the Global Industry Classification Standards (GICS) sub-industry of Electric Utilities for their similarities to us in type of industry and size of operations, currently are in our Performance Comparator Group:
The actual number of performance shares earned at the end of the three-year cycle can range from 0% to 200% of target, depending on our ranking within the Performance Comparator Group for total shareholder return. As with the time based restricted stock, participants are required to be employed at the end of the three-year cycle to be eligible for the award. Shareholder return is defined as the change in stock value plus dividends over the three-year performance period within the Performance Comparator Group, and payouts for each three-year cycle are as follows:
For the 2005-2007 performance cycle, which ended on December 31, 2007, our total shareholder return ranked fifth among the Performance Comparator Group, which resulted in performance shares earned at the 125% level.
In addition to these regular grants, we granted restricted stock to Mr. Redd in connection with his hiring as CEO in May 2007. We felt this award (which had an initial value of $650,000) was an appropriate sign-on incentive because of the two-year vesting that was imposed and the dependence of the value of the award on our stock performance.
We have chosen to make recent long-term awards to executive officers in the form of full-value stock awards rather than stock options because these stock awards have significant retention value due to their value being directly linked to the stock price in the future. In addition, this type of award
limits the negative retention impact of short-term volatility in our stock price. The Compensation Committee regularly reviews our equity incentive program and reserves the right to grant different types of equity awards in the future.
Other Executive Benefits
Retirement Benefits. We provide our employees, including our executive officers, with a tax-qualified defined benefit pension plan, which provides employees the opportunity to earn service toward income replacement at retirement. The benefit is based on years of service, retirement age and salary over a period of time prior to retirement. However, tax regulations impose a limit on the amount of compensation that can be taken into account for purposes of determining these retirement benefits. As a result, the qualified plan does not achieve a market-competitive structure for senior executives whose total compensation can include a significant amount of variable short-term incentive compensation. We established an excess benefit plan to provide supplemental retirement benefits to senior executives based on actual annual earnings applied to the basic retirement plan formula without regard to the tax limitations.
Perquisites and Other Benefits. Generally our Named Executive Officers do not receive material perquisites or other benefits different from other employees. For example, our executives participate in the same medical, dental, life insurance, accidental death & dismemberment, and long-term disability plans as do other employees, and the Company contributions to the 401(k) plan are on the same basis as other employees. However, executives are paid a small monthly car allowance and receive at a minimum five weeks and three days of paid time off annually.
Change in Control/Termination Agreements. The Committee has approved change in control severance agreements for each of our Named Executive Officers. As further described in this Proxy Statement, these agreements provide executives with benefits in the event of involuntary termination or adverse job changes in connection with or after a change in control. The Committee periodically reviews the costs of these agreements and market practice. The Committee believes these agreements offer important protection in the event of a change of control, while also ensuring that in the event of an actual proposed change of control, key executives will be willing to remain through the closing because of this protection. This is especially important in the utility industry when the need for regulatory approvals can result in significant delays in consummating transactions following the execution of definitive agreements. In March 2007, after reviewing potential costs and market practice, the Committee approved revisions to these agreements which eliminate the tax reimbursement payments previously provided if an executive is subject to the excise tax under Section 4999 of the Code and instead provide that either (i) the executive will be responsible for paying the excise tax or (ii) payments will be reduced to the extent necessary so that no portion is subject to the excise tax, whichever would result in the executive retaining the higher after-tax amount. During 2007, we entered into an employment agreement with our new CEO, Mr. Redd, which included severance protection, as described below in this proxy. The Committee approved this agreement after consideration of market data for CEOs of similar size companies and as part of a negotiation with a candidate that the Board of Directors had chosen following a broad-based executive search.
Stock Ownership Guidelines
We believe that stock ownership by executive officers can directly correlate to improved performance and enhancement of shareholder value. Therefore, the Committee has established recommended stock ownership guidelines for executive officers. The guidelines are as follows:
Our executive officers are expected (but not required) to meet these guidelines within five years after becoming an executive officer. As of the end of 2007, all of our Named Executive Officers met these guidelines or are progressing towards meeting the guidelines within their initial 5-year term.
Impact of Accounting and Tax Treatment of Compensation
Historically, the accounting and tax treatment of compensation has not been a driving factor in determining the design or amounts of pay at the Company. For example, the Company granted full value awards prior to its adoption of Financial Accounting Standards Board Statement No. 123R and continues to do so, although the Committee does review the expected accounting treatment of its equity grants.
Section 162(m) of the Code generally limits the tax deductibility to public companies for compensation in excess of $1 million per person per year, unless the compensation is performance-based within the meaning of the tax regulations. The Compensation Committee considers it important to retain flexibility to design compensation programs, even where compensation payable under our programs may not be fully deductible, if the programs effectively recognize a full range of criteria important to the Companys success. For example, the Company has not structured its annual cash bonus plan to be performance-based for purposes of Section 162(m), although for 2007 total cash compensation for each Named Executive Officer was below the $1 million limit. The Company grants some equity awards (such as restricted stock) that are not eligible for the Section 162(m) exception. Our 2007 Long-Term Incentive Plan allows the Committee to approve performance shares and stock options that qualify as performance-based compensation for purposes of Section 162(m) to the extent the Committee deems appropriate.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation and Discussion and Analysis be included in the Proxy Statement.
THE COMPENSATION COMMITTEE
James W. Cicconi, Chairman
Kenneth R. Heitz
Stephen N. Wertheimer
Charles A. Yamarone
SUMMARY OF COMPENSATION
The Summary Compensation Table sets forth the compensation paid or accrued by the Company for Ershel C. Redd, Jr., the Principal Executive Officer from May to December 2007, Gary R. Hedrick, the Principal Executive Officer from January to May 2007, Scott D. Wilson, the Principal Financial Officer, and each of the Companys other three most highly compensated executive officers. The persons named in the Summary Compensation Table are referred to collectively as the Named Executives or the Named Executive Officers.
ALL OTHER COMPENSATION TABLE
The following table describes each component of amounts included in All Other Compensation in the Summary Compensation Table above:
GRANTS OF PLAN-BASED AWARDS
The following table sets forth information concerning equity and cash awards to the Named Executive Officers during the fiscal year ended December 31, 2007:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information concerning outstanding equity awards held by the Named Executive Officers at December 31, 2007:
OPTION EXERCISES AND STOCK VESTED
The table set forth below provides additional information regarding exercise of options, the acquisition of shares on vesting and the value realized during 2007.
The Company has a defined benefit plan with a cliff vesting schedule that provides definitely determinable benefits over a period of years, usually an employees lifetime (the Pension Plan). The purpose of the Pension Plan is to reward eligible employees for long and loyal service by providing them with retirement benefits and is for the exclusive benefit of eligible employees and their beneficiaries. Employees are eligible to participate in the Pension Plan on the first day of the month coincident with or immediately following completion of one year of service during which the employee completes not less than 1,000 hours of service. In order to vest or build ownership in the benefit payable from the Pension Plan, an employee must complete five years of service during which he or she has worked at least 1,000 hours each year. Each of the Named Executive Officers is a participant in the Pension Plan, and the estimated credited years of service for each of them at December 31, 2007 is set forth in the Pension Benefits Table below.
Retirement benefits under the Pension Plan are calculated as the product of 1.25% of the employees average monthly earnings (Average Monthly Earnings) and the credited years of service (Benefit Accrual Service). An employees Average Monthly Earnings is the employees annualized rate of compensation (excluding bonuses, overtime pay, expense allowances, profit sharing and any other compensation in any form) as of any day converted to a monthly amount and then averaged over a five consecutive year period. The maximum benefit payable under the Pension Plan may not consider compensation in excess of that allowed by the Code. For the year 2007, the maximum amount of compensation on which benefits from the Pension Plan may be based is $225,000. An employee is credited with one year of Benefit Accrual Service in any plan year (January through December) during which 1,000 hours of service is completed for the Company. The formula below provides an illustration as to how a monthly retirement benefit is calculated for an employee at the later of the date the employee attains the normal retirement age of 65 or the date the employee completes five years of vested service during which he or she has worked 1,000 hours each year:
A monthly benefit from the Pension Plan is computed as a straight life only annuity that provides a monthly benefit for the employees lifetime and ends upon the employees death. Optional benefit forms of payment are also available under the Pension Plan to include:
Under the terms of the Pension Plan, an employee of the Company may retire and begin to receive a monthly benefit from the Pension Plan upon attaining age 55 and completing the required vesting period of five years during which the employee has worked 1,000 hours each year. If an employee retires from the Company between the ages of 55 and 64, the amount of benefits payable from the Pension Plan is reduced such that if the employee retires at age 55, he or she will be entitled to 50% of the accrued benefits otherwise payable without a reduction at age 65. The reduction schedule below displays the reduction percentage to which an employees accrued benefit is subject when retirement from the Company takes effect between ages 55 and 64:
A monthly benefit payable from the Pension Plan any time before normal retirement age is not subject to the reduction schedule above when the employees age and years of service are 62 and 20, respectively, or the sum of the employees age and years of service exceeds 85 with a minimum age of 55. All benefit payments are subject to federal income tax and are payable on the first day of each month of retirement.
For the valuation method and all material assumptions, please see the Retirement Plans section under Note K Employee Benefits of the Companys 2007 Form 10-K.
EXCESS BENEFIT PLAN
The Company has a non-qualified deferred compensation plan that provides supplemental retirement benefits to certain employees of the Company (the Excess Benefit Plan). The Company selects those employees who are eligible to receive a benefit from the Pension Plan, the amount of which is reduced by limitations of the Code. Additionally, the Excess Benefit Plan adds bonuses paid pursuant to the Companys short-term bonus plan to the Pension Plan definition of Average Monthly
Earnings and without giving effect to any compensation limitations imposed by the Code. Benefits payable from the Excess Benefit Plan are subject to the same vesting schedule, age requirements and benefit payment options as under the Pension Plan. Except as noted under the heading Change in Control Agreement and Other Termination Benefits, it is not possible for an employees credited years of service under the Pension Plan to exceed the employees actual years of service with the Company.
Supplemental retirement benefits under the Excess Benefit Plan are calculated as a monthly amount equal to the difference between (a) and (b) below:
The formula below provides an illustration as to how a retirement benefit from the Excess Benefit Plan is calculated for an employee at the later of the date the employee attains the normal retirement age of 65 or the date the employee completes five years of vested service during which he or she has worked 1,000 hours each year:
The Excess Benefit Plan is subject to the rules of Section 409A of the Code. Generally, under Section 409A of the Code, distributions cannot be made to certain employees (as defined in Section 416(i) of the Code) of a publicly traded corporation before the earlier of (i) six months following the employees separation date, or (ii) the death of the employee.
Pursuant to Section 409A, Excess Benefit Plan payments will begin six months after an affected employees retirement from the Company. The first payment will be paid in a sum equal to six monthly payments from the employees retirement date plus the employees seventh month payment. Thereafter, the employees benefit from the Excess Benefit Plan is payable on the first day of each month. The benefit payable from the Excess Benefit Plan is paid in the same form under which the benefit from the Pension Plan is payable to the employee. All payments are subject to federal income tax and are payable on the first day of each month of retirement.
The Excess Benefit Plan is entirely unfunded. Employees who participate in the Excess Benefit Plan have only the rights of a general unsecured creditor of the Company with respect to any rights under the Excess Benefit Plan.
PENSION BENEFITS TABLE
The table set forth below describes pension benefits to the Named Executive Officers under the Companys Pension Plan and the Excess Benefit Plan as of December 31, 2007.
The Present Value of Accumulated Benefit for each executive is computed using an interest rate of 6.4% and the RP 2000 mortality tables projected to 2015 using Scale AA.
Change in Control Agreements and Other Termination Benefits
The Company has entered into change of control agreements (the Change of Control Agreements) with each Named Executive Officer and certain other officers of the Company. In the event the covered officer is terminated without cause or resigns for good reason (including a material reduction in duties and responsibilities, a reduction in pay or a relocation of more than 100 miles) during the two-year period following a change of control, he or she will receive the following benefits under the Change of Control Agreements:
In March 2007, the Change of Control Agreements were amended to eliminate a tax gross-up payment in the event the payments become subject to the federal change in control excise tax and instead provide that either (i) the executive will be responsible for paying the excise tax or (ii) payments under the agreements will be reduced to an amount that would result in no such excise tax, whichever would result in the executive retaining the higher after-tax amount.
A change of control is defined in the Change of Control Agreements and generally includes the acquisition by any person of 30% or more of the Common Stock or voting power of the Company, or the consummation of a reorganization, merger or consolidation or other disposition of all or substantially all of the assets of the Company which results in at least a 40% change in ownership.
In May 2007, we appointed Ershel C. Redd, Jr. as our President and Chief Executive Officer, succeeding Mr. Hedrick, and entered into an employment agreement with Mr. Redd. Under the employment agreement, upon an involuntary termination without cause (other than following a change in control, which would be governed by our standard change in control agreement described above), subject to signing a general release of claims, he was eligible to receive severance benefits of up to 2 years of base salary, target bonus and health benefits, which for a termination on December 31, 2007, would have been an amount equal to $1,650,000 plus health benefits cost. Upon his termination of employment in February 2008, we agreed to pay him these severance amounts.
In May 2007, we entered into an agreement with Mr. Hedrick in connection with the termination of his employment as Chief Executive Officer. In satisfaction of any and all obligations (other than accrued compensation and benefits under health, welfare and retirement plans) resulting from Mr. Hedricks 30 years of service, he received $1,791,224 as a lump sum payment, in addition to two-and-a-half years of medical benefits and severance payments. In addition to signing a general release of claims, Mr. Hedrick agreed to provide part-time consulting services to us for a period of time and not to compete with us through October 2009, solicit our employees through October 2009 or disparage us.
The following table quantifies potential payments or benefits to our Named Executive Officers under our equity incentive plans upon a change in control or under the Change of Control Agreements upon a termination without cause or resignation for good reason following a change in control as described above, in any case based on assumptions as if the change in control or termination had occurred on December 31, 2007. These amounts do not include benefits under our Pension Plan and Excess Benefit Plan that would be paid in connection with any retirement event, as described under Pension Benefits Table above.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Compensation Committee Interlocks and Insider Participation
During 2007, none of the Companys executive officers served on the compensation committee or board of another company, one of whose executive officers served on the Companys Board or Compensation Committee.
Policies and Procedures
The Nominating and Corporate Governance Committee of the Board of Directors is responsible for reviewing and approving all related party transactions, which are defined as transactions in which (i) the Company is a participant; (ii) any related person has a direct or indirect material interest; and (iii) the amount involved exceeds $120,000, but excludes any transaction that does not require disclosure under Item 404(a) of SEC Regulation S-K. The Nominating and Corporate Governance Committee intends to approve only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders.
To identify related party transactions, each year the Company submits and requires the directors and officers to complete director and officer questionnaires identifying transactions with the Company in which the director or officer or their family members have an interest. The Company reviews related party transactions due to the potential for a conflict of interest. A conflict of interest occurs when an individuals private interest interferes, or appears to interfere, in any way with the Companys interests. The Companys Code of Ethics requires all directors, officers and employees who may have a potential or apparent conflict of interest to immediately notify our General Counsel.
Directors, officers and employees of the Company are expected to act and make decisions that are in the best interests of the Company. Directors, officers and employees are prohibited from taking any action that may make it difficult for them to perform their duties, responsibilities and services for the Company in an objective and fair manner. In addition, the Company prohibits personal loans to, or guaranteeing the personal obligations of, any director or executive officer.
A copy of the Companys Code of Ethics is available at www.epelectric.com.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 10, 2008 (except as indicated in the footnote to the table), certain information regarding ownership of Common Stock by (i) each person known to the Company to own beneficially more than 5% of its Common Stock; (ii) each of the current directors, including those who have been nominated to serve as Class II Directors of the Company; (iii) the persons who served as Chief Executive Officer and Chief Financial Officer of the Company during the year ended December 31, 2007; (iv) the top three most highly compensated employees other than the Chief Executive Officer and Chief Financial Officer; and (v) all directors and current officers of the Company as a group (26 persons).
AUDIT COMMITTEE REPORT
The Audit Committee assists the Board of Directors in reviewing the Companys financial reporting process. In fulfilling its responsibilities in 2007, the Audit Committee, among other things, (1) reviewed and discussed the interim financial information contained in each quarterly earnings announcement with the Companys Chief Financial Officer and independent auditors prior to public release; (2) reviewed and discussed the audited financial information contained in the Annual Report with the Companys management, including the Chief Financial Officer and independent auditors prior to public release; (3) obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors independence consistent with Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees; (4) discussed with the auditors any relationships that may impact their objectivity and independence, and satisfied itself as to the auditors independence; (5) discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Companys internal controls and the internal audit functions organization, responsibilities, budget and staffing; and (6) reviewed with both, the independent and the internal auditors, their audit plans, audit scope, and identification of audit risks.
In addition, the Audit Committee discussed and reviewed with the independent auditors all communications required by generally accepted accounting standards, including those described in Statement on Auditing Standards No. 61, as amended, Communication with Audit Committees and, with and without management present, discussed and reviewed the results of the independent auditors examination of the financial statements. The Audit Committee also reviewed the results of the internal audit examinations.
The Audit Committee reviewed the audited financial statements of the Company as of and for the fiscal year ended December 31, 2007, with management and the independent auditors. Management is responsible for the preparation of the Companys financial statements and the independent auditors are responsible for the examination of those statements.
Based on the above-mentioned review and discussions with management and the independent auditors, the Audit Committee recommended to the Board of Directors that the Companys audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007, for filing with the SEC. The Audit Committee also recommended the reappointment of KPMG LLP as the Companys independent auditors, and the Board of Directors concurred in such recommendation.
Submitted by the Audit Committee of the Companys Board of Directors:
Charles A. YamaroneChairman
John Robert Brown
James W. Cicconi
Michael K. Parks
Eric B. Siegel
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Act requires the Companys directors, officers and holders of more than 10% of the Companys Common Stock to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. The Company believes that, during and for the fiscal year ended December 31, 2007, its directors, officers and 10% shareholders complied with all Section 16(a) filing requirements.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Under certain circumstances, shareholders are entitled to present proposals at shareholders meetings. To be eligible for inclusion in the Proxy Statement for the Companys 2009 annual meeting of shareholders, a shareholder proposal must be received at the Companys principal executive offices on or prior to December 1, 2008. The Company will consider only those proposals which meet the requirements of applicable SEC rules. Under the Companys Bylaws, in order for a shareholder proposal that is not included in the Proxy Statement to be properly brought before the annual meeting of shareholders, notice of the proposal must be received at the Companys principal executive offices at least 80 days prior to the scheduled date of the annual meeting. A shareholders notice should list each proposal and a brief description of the business to be brought before the meeting; the name and address of the shareholder proposing such business; the class and number of shares held by the shareholder; and any material interest of the shareholder in the business. If a shareholder wishes to nominate a director, the shareholder must provide the nomination to the Nominating and Corporate Governance Committee in writing at the Companys principal offices pursuant to the notice provisions provided in the Companys Bylaws.
The Board of Directors knows of no business, other than as stated in the Notice of Annual Meeting of Shareholders, which will be presented for consideration at the Annual Meeting. If, however, other matters are properly brought before the Annual Meeting, it is the intention of the persons named in the accompanying form of proxy to vote the shares represented thereby on such matters in accordance with their discretion and judgment as to the best interests of the Company.
The Companys 2007 Annual Report, which includes financial statements, but which does not constitute a part of the proxy solicitation material, accompanies this Proxy Statement.
SARBANES-OXLEY SECTION 302 CERTIFICATION
On February 29, 2008, the Company filed with the SEC, as an exhibit to its Form 10-K, the Sarbanes-Oxley Act Section 302 certification regarding the quality of the Companys public disclosure.
DELIVERY OF PROXY STATEMENT
Pursuant to the new rules adopted by the Securities and Exchange Commission, the Company has elected to provide access to the proxy materials over the Internet. Accordingly, the Company sent a Notice of Internet Availability of Proxy Materials (the Notice) to shareholders of record and beneficial owners. All shareholders will have the ability to access the proxy materials on the website referred to in the Notice or request to receive a printed set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found on the Notice. In addition, shareholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.
EL PASO ELECTRIC COMPANY
By Order of the Board of Directors
Guillermo Silva, Jr.
Dated: March 28, 2008
Important Notice Regarding Internet Availability of Proxy Materials for the Annual Meeting of Shareholders:
The Annual Report, Notice and Proxy Statement are available at www.proxyvote.com.