EXHIBIT 10.2

EMPLOYMENT SEPARATION AGREEMENT AND RELEASE

This Employment Separation Agreement and Release ("Agreement") is a contract
entered into between EI Paso Electric Company, a Texas corporation (the
"Company"), and Gary R. Hedrick ("Officer"), and is effective as of May 18, 2007
(the “Effective Date”) unless revoked by Officer within seven (7) days following
its execution by Officer.

WHEREAS, Officer has been a valued employee of the Company for nearly 30 years,
including its President and Chief Executive Officer for the last six and
one-half years, and continues to be recognized as a leading figure in the
communities served by the Company; and

WHEREAS, the Company and Officer have reached an accord regarding the financial
and other aspects of Officer’s separation from employment; and

WHEREAS, the Company and Officer desire to enter into this Agreement.

NOW, THEREFORE, in consideration of the foregoing recitals, and the mutual
promises and agreements hereinafter set forth, the Company and Officer agree as
follows:

1. Separation. Officer agrees that his employment as President and Chief
Executive Officer of the Company and, except as set forth in the next sentence,
all other positions which Officer holds with the Company, its subsidiaries, and
affiliates, ceased at 5:00 p.m. on the Effective Date. Officer will continue to
serve on the Board of Directors but will resign from the Executive Committee,
effective immediately. Except as provided in this Agreement, Officer agrees not
to seek reemployment with the Company, its subsidiaries, and affiliates, and no
payments made to Officer under the terms of this Agreement shall be construed as
a continuation of Officer's employment with the Company. This provision does not
prohibit Officer from working for the Company at the Company’s request.

2. Payments to Officer; Consulting Obligation. The Company agrees to make a
one-time settlement payment of $1,791,224 as soon as practicable following the
Effective Date and, in addition, will pay a severance to Officer as follows:
(a) one payment of $11,739.13 on May 31, 2007; (b) seven payments of $30,000 on
the last business day of each month from June through December 2007; and
(c) twenty-two payments of $20,852 on the last business day of each month from
January 2008 through October 2009 (in each case, less deductions for applicable
federal, state, and local taxes, all and in each instance in accordance with the
payment practices of the Company); provided, however, that as conditions
precedent to any entitlement to any payment under this Section 2, Officer must
(i) execute and deliver this Agreement to the Company, (ii) not revoke or
otherwise withdraw his acceptance of this Agreement for a period of seven (7)
days following such delivery of this Agreement, and (iii) not be in breach or
default of any provision of this Agreement; and provided further, payments
otherwise due under this
 
 
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Section 2 or Section 3(b)(ii) within the six-month period following the
Effective Date shall be paid in a lump sum cash payment within five (5) business
days following the six-month anniversary of the Effective Date. As additional
consideration for such payments, through October 31, 2009, Officer agrees to be
available at reasonable times (following adequate notice) as required to provide
consulting services, including regulatory advice or meetings with regulators,
testimony and/or service on civic and charitable boards, upon the Company's
request, with respect to matters within the scope of Officer's duties and
responsibilities during employment. Officer agrees that the payments pursuant to
this Section 2 are in lieu of fees payable to him for service on the Board, and
he waives all Director fees (including any grants of options or restricted
shares) otherwise payable through the term of this Agreement.

3. Other Benefits.

(a) Officer is a participant in the Company’s Retirement Income Plan for
Employees (“RIP”) and Excess Benefit Plan (“EBP”). Nothing in this Agreement
shall affect Officer’s rights (as such exist immediately prior to 5:00 p.m. on
the Effective Date) under the RIP and EBP.

(b) (i) The Company shall pay Officer on the Effective Date or as soon
thereafter as practicable a cash lump sum of $199,665.22 for unused hours of
“Current PTO,” “New PTO” and “Old PTO”, which represent hours worked and
“banked” in accordance with the Company’s policies, subject to deductions for
applicable federal, state, and/or local taxes.

(ii) Officer may elect to continue, at the Company’s expense, health care,
medical and dental benefit coverage under and in accordance with the provisions
of the Company's Employee Welfare Benefit Plan, the Consolidated Omnibus Budget
Reconciliation Act of 1996 ("COBRA"), and Section 4980B of the Internal Revenue
Code (the “Code”) through October 31, 2009 (or, if Officer is no longer eligible
for COBRA prior to such date other than because he becomes eligible under
another employer’s health plan, Company will pay an amount equal to the premiums
paid under COBRA through such date), and thereafter as permitted by applicable
law and regulations, pursuant to the terms provided other retirees of the
Company, at his own expense.

(iii) Officer is also entitled to all amounts, if any, accrued by and vested in
Officer as of the Effective Date, under and in accordance with the El Paso
Electric Company Savings Plan ("401(k) Plan").

(iv) Company agrees to make available to Officer at no cost through November 30,
2007 an office (at a location in El Paso acceptable to the Company) with
secretarial assistance and telecommunications services.

(v) Except as otherwise provided in this Agreement, Officer's participation in
any and all other benefit and compensation plans and arrangements of the Company
(including, without limitation, accident and disability insurance programs and
life
 
 
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insurance) are deemed by both parties to have ceased on the Effective Date,
other than such plans, if any, afforded to all other retirees of the Company.

4. Releases.

(a) Officer agrees to and does fully and completely release, discharge and waive
any and all claims, complaints, causes of action, demands of whatever kind or
nature which Officer has or may have against the Company, its subsidiaries,
affiliates, predecessors, and successors and all of their respective directors,
officers, and employees by reason of any event, matter, cause, or thing that has
occurred prior to the date of execution of this Agreement (hereinafter "Officer
Claims"). Officer agrees that this Agreement specifically covers, but is not
limited to, any and all Officer Claims which Officer has or may have against the
Company relating in any way to compensation, or to any other terms, conditions,
or circumstances of Officer's employment with the Company, and to the cessation
of such employment, based on statutory or common law claims for employment
discrimination, including claims under Title VII, the Age Discrimination in
Employment Act, Americans with Disabilities Act, and any and all discrimination
or retaliation claims under state or federal law, wrongful discharge, breach of
contract, defamation, intentional infliction of emotional distress, breach of
fiduciary duty, or any other theory whether legal or equitable; provided,
however, that this release shall not affect Officer's rights under or with
respect to any retirement plan which is subject to ERISA and is qualified under
Section 401(a) of the Code. Notwithstanding the foregoing, Officer does not
waive any right he may have to enforce this Agreement.

(b) The Company agrees to release Officer from any and all claims, causes of
action, or liabilities of the Company against Officer arising under and relating
to Officer's acts or omissions occurring on or before the Effective Date in the
course, scope and duties of Officer's employment with the Company; provided
however, this release shall not apply to any claim, cause of action, or
liability arising from any breach of fiduciary duty, gross negligence, willful
misconduct or intentional tort by Officer or any act or omission which
improperly benefited Officer personally. Notwithstanding the foregoing, the
Company does not waive any right it may have to enforce this Agreement, and
Officer does not waive any right he may have to indemnification by the Company
as provided under the Company’s Bylaws or applicable law.

(c) This Agreement constitutes a general release and is not an admission of
liability by either party. The Company and any other persons released have
denied liability, and the Company has agreed to pay the consideration set forth
herein merely to avoid disputes or litigation and in an effort to ease the
economic impact of Officer's separation from employment. To the extent any
claims against the Company have not been released by this Agreement, Officer
assigns those claims to the Company. Notwithstanding the foregoing, Officer does
not waive any right he may have to enforce this Agreement.
 
 
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5. Confidentiality; No Disparagement; No Adverse Positions.

(a) Officer agrees not to cause or participate in the publication of any
information concerning the facts underlying the cessation of Officer's
employment with the Company or the terms and conditions of this Agreement to any
person or entity, except as required by law or legal process. This provision
shall not prevent Officer from disclosing such information to Officer's
immediate family or to Officer's legal counsel and accountants in order to
obtain professional advice; provided that each are advised as to and agree to
observe the confidentiality of such information. Officer acknowledges that he
has reviewed a copy of the press release (and related SEC Form 8-K) to be issued
in connection with his separation from employment.

(b) Officer agrees that he shall not make negative statements or
representations, or otherwise communicate negatively, directly or indirectly, in
writing, orally, or otherwise, or take any action which may, directly or
indirectly, disparage or be damaging to the Company its subsidiaries,
affiliates, successors or their respective officers, directors, employees,
businesses or reputations. Officer does not waive any obligation to testify
truthfully regarding matters involving the Company if required by law or legal
process.

(c) The Company agrees that it shall not, and shall not authorize any officer,
agent, employee, or other representative of the Company to make negative
statements or representations, or otherwise communicate negatively, directly or
indirectly, in writing, orally or otherwise, concerning Officer's performance of
his duties while employed by the Company (other than the Company's employees
with a need to know, legal counsel and accountants, or, if necessary, in any
litigation involving the Company or by filing a copy of this Agreement pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, or as
otherwise required by law), or in connection therewith take any action which
may, directly or indirectly, in any way disparage or be damaging to Officer. The
Company does not waive its obligation, or that of its employees and agents, to
testify truthfully as required by law or legal process. Officer acknowledges
that the Company will be required to file a copy of this Agreement with the SEC
pursuant to the Securities Exchange Act of 1934.

(d) Officer agrees that until October 31, 2009, Officer shall not, without the
prior written consent of the Board, directly or indirectly, and whether as an
employee, officer, director, manager, partner, consultant, agent or otherwise,
alone or in association with any other person or organization, do any of the
following:

(i) carry on a business in which the Company is engaged in its service area in
Texas and New Mexico;

(ii) interfere with the business of the Company or hold any position or accept
any engagement that may require him to take a position adverse to that of the
Company in any matter;
 
 
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(iii) induce any employee, customer or supplier of the Company to terminate its
relationship with the Company;

 
provided that nothing herein shall limit Officer’s right to hold a passive
investment of not more than 1% of the equity securities of any corporation that
is listed on a national securities exchange.

(e) Officer specifically acknowledges and agrees that if he fails to comply with
any of the covenants contained in this Section 5, (i) he shall forfeit any
amounts due under Section 2 of this Agreement not previously paid, and (ii) he
shall repay to the Company any amounts previously paid under Section 2 and 3 of
this Agreement.

6. Taxes. Officer agrees to be solely and fully responsible for satisfying any
federal, state, or local income tax liability that may be assessed against
Officer as a result of any payments tendered by the Company pursuant to this
Agreement or as a result of the exercise of Officer’s vested stock options or
the termination of restrictions on the sale or transfer of any restricted
shares. Officer acknowledges the Company has provided no legal or other advice
to him concerning the tax consequences, if any, of the payments made under this
Agreement.

7. Proprietary Information. Officer acknowledges that the Company's and its
affiliates' trade secrets, information concerning legislation, regulation, tax,
litigation, labor, securities, customers, employees, facilities, products and
their development, technical information, marketing, investment, and sales
activities and procedures, promotion and pricing techniques, credit and
financial data, and other information concerning the Company or its affiliates
and any information of third parties made available to the Company, its
subsidiaries, or affiliates (the "Proprietary Information") are valuable,
special, and unique assets of the Company and its affiliates, access to and
knowledge of which have been gained by virtue of Officer's position and
involvement with the Company and its affiliates. Officer agrees that all
Proprietary Information obtained by Officer as a result of any such position or
involvement shall be considered confidential. In recognition of such fact,
Officer agrees that Officer will not disclose any such Proprietary Information
to any person or other entity for any reason or purpose whatsoever, and that
Officer will not make use of any Proprietary Information for his own purposes or
for the benefit of any person or other entity.

8. Remedies. Officer agrees that, in addition to any other remedy at law or in
equity that Company may have upon a material breach of this Agreement, Officer
shall refund the amount of all payments received from Company under Section 2
and shall forfeit his right to receive any future payments under Section 2. In
addition, Officer acknowledges and agrees that the Company's remedies at law for
a breach or threatened breach of any of the provisions of Section 7(b) would be
inadequate and, in recognition of this fact, Officer agrees that, in the event
of a breach or threatened breach, in addition to any remedies at law, the
Company, without posting any bond, shall be entitled to obtain equitable relief
in the form of specific performance, temporary restraining order, temporary or
permanent injunction and any other equitable remedy which may then be available.
 
 
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9. Entire Agreement, Amendment. This Agreement shall supercede any and all
existing agreements between Officer and the Company or any of its affiliates
relating to the terms of Officer's employment, and contains the entire
understanding of the parties with respect to the termination of Officer's
employment. It may not be altered, modified, or amended except by a written
agreement signed by both parties hereto.

10. No Waiver. The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver of such
party's rights or deprive such party of the right thereafter to insist upon
strict adherence to that term or any other term of this Agreement

11. Severability. In the event that any one or more of the provisions of this
Agreement shall be or become invalid, illegal, or unenforceable in any respect,
the validity, legality or enforceability of the remaining provisions of this
Agreement shall not be affected thereby.

12. Benefits of Agreement. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, representatives,
successors, and assigns.

13. Attorneys' Fees. If legal or equitable action is filed to enforce the terms
of this Agreement, the prevailing party shall be entitled to court costs,
collection costs, and reasonable attorneys' fees in addition to any other relief
to which the party may be entitled.

14. Acknowledgement. Officer acknowledges that Officer has carefully read this
Agreement, fully understands and accepts all of its provisions. Officer further
acknowledges that Officer has been provided a full opportunity to review and
reflect on the terms of this Agreement, has been advised by Company to seek the
advice of legal counsel of Officer's choice, and signs the Agreement
voluntarily, of his own free will, and has signed an acknowledgement (Exhibit A,
fully incorporated herein by this reference) to that effect.

15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without reference to its
conflicts of law or choice of laws rules.

16. Counterparts. This Agreement may be signed in counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective as of the date and year first above written.

/s/ Gary R. Hedrick                             
Gary R. Hedrick

May 11, 2007                                      
Date of Execution

EL PASO ELECTRIC COMPANY

By: /s/ Michael K. Parks                     
Name: Michael K. Parks
Title: Vice Chairman

May 11, 2007                                      
Date of Execution
 

 
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EXHIBIT A

ACKNOWLEDGEMENT

I acknowledge that I am allowed twenty-one (21) days to review and consider the
Employment Separation Agreement and Release ("Agreement") attached hereto. I
have also been advised verbally and by this writing of my right to consult with
an attorney prior to executing this Agreement. I understand that by signing the
Agreement, I am voluntarily relinquishing, in exchange for the benefits and
consideration listed in the Agreement, my past and present right to bring any
claim, including those under the Civil Rights Act of 1964, 42 U.S.C §2000(e) et
seq., the Americans with Disabilities Act, the Age Discrimination in Employment
Act, the Texas Labor Code, and any other equivalent federal or state laws or
statutes, against El Paso Electric Company. I do not waive any claims that may
arise after the Effective Date of the Agreement. I am further aware that even if
I sign the Agreement, I may revoke the Agreement for a period of seven (7) days
following the day I sign the Agreement, and the Agreement shall not be effective
or enforceable until the revocation period has expired.

/s/ Gary R. Hedrick                            
Gary R. Hedrick

May 11, 2007                                     
Date of Receipt