Below is a copy of El Paso Electric's most recent 10Q (11/12/98). I have read it and am quite concerned about their status with regard to y2k remediation. Does anyone share my concern?

El Paso Electric 10Q (11/12/98) YEAR 2000 PREPAREDNESS

The Company faces the same concerns as most other companies that use computers relating to the Year 2000 problem. The problem is that many computer programs use only the last two digits to refer to a year. Consequently, these programs do not recognize a year that begins with "20" instead of the familiar "19." Applications that are date sensitive may not properly calculate information or may not function. Problems may arise in information technology ("IT") systems, including those which allow the Company to operate generation, transmission and distribution facilities, manage customer billing accounts, process payroll for employees, and conduct all of the other functions needed to operate the Company's business, as well as non-IT systems that contain date and time functions. Affected non-IT systems containing embedded chips that are date sensitive can include electric meters, security systems, substation generators, communication systems and many other devices. Identifying which of these systems are essential for the Company to operate is a significant step, and these systems are designated as "Mission Critical."

The Company began working on the Year 2000 computer concern during the last quarter of 1996 with a program consisting of four major phases: inventory, assessment, remediation and testing for Year 2000 compliance. In this context, compliance means that the system or device in question will continue to function after December 31, 1999 in the way in which it was designed. Most systems can proceed through the various phases independently so that the Company need not entirely complete one phase before beginning the next.

The Company started the inventory phase for its IT systems in October 1996 and is nearing 100% completion. The inventory phase for non-IT systems is substantially complete, having been initiated in February 1998. After the initial inventory phase has been completed, the Company will continue to update the information as appropriate, such as when the Company purchases new software or hardware.

The Company has completed the majority of the assessment phase regarding IT systems. Assessment of non-IT systems has begun, but has been completed for only a few systems. The Company expects the assessment phase for IT systems to be substantially completed by the end of 1998, and for non-IT systems, early in 1999. However, as the Company purchases new software and other products in 1999, additional vendor representations must be obtained and assessments completed.

The third phase of the Year 2000 program is remediation. While the Company is employing remediation procedures generally accepted as standard, there are no guarantees such efforts will be entirely successful. At this point, the Company believes it has completed remediation on approximately half of the IT systems requiring remediation, including at least half of the Mission Critical systems. The Company has recently begun remediating some non-IT systems even though the non-IT assessment phase is not yet complete. Although there can be no assurance that future events will not cause delays in the process, at this time the Company expects to have completed the remediation phase for nearly all of the Mission Critical IT and non-IT systems by March 31, 1999.

The Company will continue to test for Year 2000 compliance throughout 1999. With respect to IT systems, the Company estimates that nearly half of the testing which will be done before January 1, 2000 has been completed. Testing for non-IT systems has recently begun, but has not yet been completed on a significant number of such systems. While the Company intends to test 100% of its IT systems, it intends to utilize representative sample testing with respect to some non-IT systems. The Company may also rely on vendor representations and reports of tests conducted by other parties with respect to certain non-IT systems. Although there can be no assurance that future events will not cause delays in the process, at this time the Company expects to have completed testing on the majority of the Mission Critical IT and non-IT systems by March 31, 1999.

Because of the integrated nature of the Company's business with other utilities and its joint facilities operated by other utilities, the Company is inquiring about and reviewing the activities of the other utilities that comprise the integrated system. In addition, the Company is inquiring about and assessing the activities of its financial institutions and major suppliers and customers to determine their readiness for Year 2000 issues. The successful operation of the operators of Palo Verde and other facilities from which the Company receives energy, water companies, gas suppliers and other suppliers will be critical to the Company's ability to limit the impact of any Year 2000 problem which may arise. Given the complex nature of this problem and the potential overlap with systems beyond the Company's control, the Company cannot assure that it will not experience some outages or operational failures relating to the Year 2000 problem.

The Company expects to retain the services of an independent consulting firm to review the Company's Year 2000 program, assess the remediation and testing procedures and advise the Company on the best way to proceed in the time remaining before January 1, 2000. This consulting firm is expected to provide the Company with a report on the Year 2000 program during the fourth quarter of 1998, the cost of which will not be substantial.

The Company expects that the historical and estimated costs of its Year 2000 program, which includes all costs of assessment, remediation and testing as well as the costs of modifying and replacing software and hiring consultants, will be significant but will not be material in relation to the Company's financial position or the Company's results of operations or cash flows in any future reporting period. The Company will expense such costs as incurred. At this time, the Company's expenses on the Year 2000 program have been minimal since the inventory and assessment phases basically involved only internal labor costs and most of the remediation completed to date has consisted of internally revising

computer programs and capital outlays for purchases of new software and computer systems already scheduled for replacement. Future expenses may include costs for the early replacement of computers and other systems on an accelerated schedule to meet the Year 2000 deadline. Nonetheless, the vast majority of total costs of the Year 2000 program will be internal labor costs.

Failure by the Company to meet the challenges of the Year 2000 problem can result in serious problems. A malfunction in a system affecting the generation, transmission or distribution of energy to the Company's customers, whether caused by a problem with one of the Company's IT or non-IT systems or a system operated by a third party, could result in a disruption of service. The severity and cost of the problem would depend on numerous factors, including the scope and duration of any such disruption. If the disruption is severe enough, the Company's operations and financial condition could be adversely affected, the extent of which cannot be predicted.

There are no guarantees that all vendor representations obtained by the Company will prove to be entirely accurate and that the testing and remediation procedures employed by the Company will identify and correct 100% of the potential problems associated with the Year 2000 problem. Because there is a chance that on January 1, 2000 there will be some system failures in the utility industry and otherwise, the Company is also working on contingency plans. Utilities have always had to plan for unexpected outages at their facilities (resulting from storms and other natural disasters), and these pre-existing plans form the core of the Company's contingency plan. Operators at the Company's generating facilities already know how to respond if there is a complete loss of power and generators must be brought back into operation manually. Similar procedures, including plans for dealing with an even wider array of difficulties resulting from the simultaneous failures of the systems of many of the Company's suppliers, government agencies, etc., are being developed based on the Company's basic contingency model. The complete contingency plan is not yet fully developed and the Company will continue to work on such plan throughout 1998 and 1999.

-- Anonymous, November 22, 1998

Answers

Ray, the status of El Paso Electric does indicate valid cause for concern. I'm going to make a statement which I admit upfront is a subjective one. Of all the 10Q's I've read in the last month, the "tone" of this one verges more toward major anxiety than the rest. From my perspective, those at El Paso Electric know they have severe problems and have become very worried.

One factual statement which reinforces my subjective call is: "The Company expects to retain the services of an independent consulting firm to review the Company's Year 2000 program, assess the remediation and testing procedures and advise the Company on the best way to proceed in the time remaining before January 1, 2000. " The fact that they want outside advice on how to proceed in the time remaining to them, says to me that there is not enough resources to finish what they think needs to be finished, and they see the need for help in focusing on what CAN be done between now and 2000.

Again, I admit this is just my take, but this 10Q rang warning bells for me that other ones haven't. The good news is that I would say the powers that be at El Paso Electric are now fully aware and in crisis-adaptation mode. In this aspect, it's better than some of the complacent "we'll make it", all-evidence-to-the-contrary, tones of other companies, but I'd still be arranging for a just-in-case alternate energy source if I were one of their customers.

-- Anonymous, November 22, 1998

Where do you find these 10Qs?

-- Anonymous, November 23, 1998

Here is the site I use. Just type in the name of the Utility Co.

http://www.sec.gov/cgi-bin/srch-edgar

The y2k info is usually quite a ways down the report.

Ray

-- Anonymous, November 23, 1998

While the Company intends to test 100% of its IT systems, it 
intends to utilize representative sample testing with 
respect to some non-IT systems. The Company may also rely on vendor 
representations and reports of tests conducted by other parties with 
respect to certain non-IT systems

This means that they will be doing type testing of the embedded systems. This scares me. My son recently did some embedded systems testing and remediation for the company he works for: 8 sites (not electric utility), all of which were entirely different, and would have failed had each new system not been specifically tailored.

Type testing is a 'get rich quick' scheme........test one system and, if it passes, declare all of the same type compliant. It can be a dealy trap.

De Lewis

-- Anonymous, November 23, 1998

De Lewis is right to point out the problems with type testing. Unfortunately, with a deadline breathing down their necks, a lot of companies are cutting any corners they can because they've realized they don't have enough time left to do a thorough job. I don't think it's so much a "get rich quick" scheme (although it COULD be due to cost cutting financial departments) as it is part of the escalation of awareness of the extent of the problems. We're beginning to see a lot of hard choices being made now. When you realize there's not time for everything to be fixed in even critical systems, you try to pack as much as you can into the time left. A lot of finger-crossing shortcuts will be decided on and type testing is one of them. Scary? Yes. But for some, it's the only viable option when you're out of time.

-- Anonymous, November 23, 1998

It's rather clear that El Paso Electric has not allowed nearly enough time for remediation and testing of non-IT systems (i.e., embedded systems). They won't finish even assessing such systems until early 1999, yet we are to believe that remediation/replacement of all problem systems, and testing of most of them, will be done by 3/31/99.

This whole filing rather reminds me of some other bad ones lately--for instance, Conectiv Co., a power company based in Wilmington DE (where I have close friends), admitted in its October 10Q filing to having done 0% remediation of embedded systems thus far. Niagara Mohawk, in its latest 10Q filing, had spent only 12% of its Y2K budget so far. (The average expenditure thus far for major power companies, based on Yardeni's analysis, is roughly 31% of the total projected Y2K budget.)

Back to El Paso Electric. I have a personal interest here, since I live almost in the shadow of Elephant Butte Dam (near Truth or Consequences, NM), whose hydroelectric plant supplies all of its power directly to El Paso to supplement coal-fired plants there. (T or C, alas, depends upon power from a nuke in Arizona.) Our County Emergency Services Manager, Russ Peterson, can't seem to get any answers from the E.B. chief engineer as to whether some power might be diverted to T or C in an emergency. I may have just gotten an insight as to why that is.

-- Anonymous, December 31, 1998