EXHIBIT 10.1

     Annual Short-Term
Bonus Plan      Plan Document

 

El Paso Electric Company

 

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Plan Overview

 

Purpose

 

Short–term incentives (annual variable pay) serve to communicate, align, and pay
for contributions toward organizational objectives and performance goals. The
objectives for the El Paso Electric Company (“EPE”) Plan are to:

 

  •   Develop a common understanding of the EPE’s initiatives, objectives, and
goals for the coming year;

 

  •   Develop clear expectations and understanding of an individual’s
contribution to overall EPE’s goals;

 

  •   Reward employees when goals are obtained;

 

  •   Provide opportunity to earn a competitive level of incentive pay for
efforts toward achieving corporate and individual performance goals; and

 

  •   Compensate employees at the 50th percentile through annual incentives in
years when the EPE and the individual achieve target level performance; the
incentive plan should offer upside potential for years in which EPE and
individual performance exceed expectations.

 

Plan Name

 

Annual Short-Term Bonus Plan (“the Plan”)

 

Effective Date

 

The Plan is effective as of January 1, 2005, as approved by the Compensation
Committee of the Board of Directors of EPE (the “Compensation Committee”).

 

Eligibility

 

Eligible employees for the Plan include all regular full-time and part-time
employees of EPE, except temporary and Mirasol employees unless otherwise
determined by the Compensation Committee.

 

The Compensation Committee may revise or amend the eligibility criteria from
time to time, which may be on the recommendation of EPE management.

 

Participation

 

Newly eligible employees begin participating in the Plan during the calendar
year in which they become eligible. Overall awards will be prorated based upon
active employment with EPE.

 

Award Opportunities

 

Each eligible plan participant will be assigned a target award opportunity,
which will be communicated at the beginning of the plan year. Target award
opportunities will be expressed as a percentage of base salary for

 

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exempt employees and as a percentage of total earnings, which includes overtime
for nonexempt employees. The target awards are intended to deliver competitive
incentive opportunities that are generally in line with the desired competitive
compensation levels for EPE. The target award represents the level of bonus
payment the participant may earn in the event plan performance is achieved at
“target,” and acceptable organizational standards are met.

 

In addition, a threshold and maximum award level will be established (as a
percent of target) adjusting payouts for performance levels that exceed or fall
below expectations.

 

The annual award opportunities for the anticipated current plan year
participants are summarized in Appendix A attached hereto (with the Compensation
Committee to establish the annual award opportunities for future years by
resolution).

 

Performance Measurement

 

Near the beginning of each calendar year, senior management will establish and
communicate the specific range of performance objectives for EPE. The goals and
key performance factors will be recommended by management and approved by the
Compensation Committee.

 

At the end of the calendar year, the overall performance against these goals
will be assessed and the resulting incentive amounts will be calculated. The
formula calculation will be applied in a consistent manner across EPE, and will
be communicated to employees. The Compensation Committee will review and approve
the aggregate payment of the final awards.

 

Performance Measures

 

The following three elements of performance will be measured, unless otherwise
determined by the Compensation Committee for any year:

 

Financial Performance   

•      Earnings Per Share (“EPS”)

Operational Performance   

•      Customer Satisfaction

 

•      Safety

Individual Performance   

•      Performance Rating (through EPE Performance Management process)

 

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Each measure will be weighted as a percent of total incentive opportunity. The
following table illustrates the performance measures used and the corresponding
weighting of each, unless otherwise determined by the Compensation Committee for
any year:

 

Performance Measures

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   Executives,
Managers, Supervisors
and Employees
(Low Risk)

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    Medium and High Risk
Supervisors and
Employees

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Financial Performance

            

EPS

   70 %   70 %

Operational Performance

            

Customer Satisfaction

   25 %   30 %

Safety

   5 %   Quarterly Safety Plan1  

Total (as a % of target)

   100 %   100 %

 

Performance Goals

 

The table attached hereto as Appendix B outlines the actual performance measures
defined for the current plan year (with the Compensation Committee to establish
the performance measures for future years by resolution). The EPS threshold acts
as a plan trigger; no plan payouts will be made unless EPE achieves at least the
EPS recommended by management and approved by the Compensation Committee. Safety
will only be measured in the Plan for executives, managers, and low risk
employees. Medium and high-risk employees are rewarded for safety on the
Company’s quarterly safety plan. The Compensation Committee may interpolate
between defined levels for financial performance only.

 

Individual Performance Modifier

 

An individual performance modifier will be applied to the calculation of
financial and operational performance. Individual performance is defined as
achievement of goals and objectives as specified through EPE’s performance
management process. The total percent of calculated award is adjusted depending
upon the assigned multiplier, unless otherwise determined by the Compensation
Committee.

 

Individual Overall Rating

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   Multiplier
Range

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Top 20% of performers

   1.30-1.50

Next 35% of performers

   0.95-1.15

Next 35% of performers

   0.65-0.85

Bottom 10% of performers

   0.00

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1 Overall bonus paid is reduced by quarterly safety bonuses paid during
performance period under the Company’s quarterly safety plan.

 

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Interpolation of Performance and Payouts

 

Financial performance and payout is generally calculated by interpolation
between defined levels of performance. The table attached hereto as Appendix C
demonstrates how the financial interpolation would work in the Plan.

 

Example Calculations

 

Attached hereto as Appendix D are examples of the calculation of awards for the
current year based on specific employee and performance profiles.

 

Funding

 

The Plan will be considered a self-funded plan. Incentives will be accrued for
accounting purposes on a quarterly basis based on EPE performance at that point
in time.

 

Award Payouts

 

If performance achievement is met, all payouts of awards under the Plan will be
made in cash (subject to applicable taxes and withholding), as soon as possible,
after calendar year results have been finalized and approved by the Compensation
Committee. The payouts will not be included in the definition of compensation
for welfare and qualified benefit plan purposes.

 

Participants must be employed with EPE on the last day of the fiscal year as
well as on the Plan payout date in order to receive an award.

 

Payments will be made on an annual basis, subject to plan provisions.

 

Employment Changes

 

Generally, participants must be employed with EPE on the date bonuses are paid
in order to receive any award. Participants who terminate during the calendar
year due to death, disability, or retirement (separation at age 55 or over) will
receive a prorated portion of any payout paid based on the salary plus overtime
earnings for actual period of time worked during the calendar year. The
individual performance modifier will be based on the prior year performance
rating. Participants that are discharged “for cause” will not be entitled to an
award payment.

 

Participation in the Plan for a given plan year will not be construed to confer
a right to participate in the Plan in any subsequent year, or the right to
continue in EPE’s employment.

 

Governance

 

Senior management and the Compensation Committee will be responsible for the
administration and governance of the Plan. The decisions of the Compensation
Committee shall be conclusive and binding on all participants.

 

Amendment, Modification, or Termination of Plan

 

The EPE, by action of its Compensation Committee, reserves the right to amend,
modify, or terminate the Plan at any time.

 

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APPENDIX A

 

The annual award opportunities for the anticipated 2005 plan year participants
are summarized below:

 

Grade/Level

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   Threshold

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   Target

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   Maximum

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CEO

              

EVPs / SVPs

              

VPs

              

Other Executives

              

*13 -15

              

  4 -12

              

N4-N13

              

Bargaining Unit

              

 

* Employees in Grades 11 – 12 in a position with “Manager” in the title will
have the same award opportunity as those in Grades 13 - 15.

 

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APPENDIX B

 

2005 Performance Goals

 

The table below outlines the actual performance measures defined for the 2005
plan year. The EPS threshold acts as a plan trigger; no plan payouts will be
made unless EPE achieves at least $             EPS. Safety will only be
measured in the Plan for executives, managers, and low risk employees. Medium
and high-risk employees are rewarded for safety on the Company’s quarterly
safety plan. The Compensation Committee may interpolate between defined levels
for financial performance only.

 

Measure

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Definition

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   Performance Level

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      Threshold

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   Target

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   Maximum

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Financial

   EPS               

Operational

(Customer Satisfaction)

  

Customer Satisfaction

Survey Results

              

Operational

(Safety)

  

•      Lost Time incidents

 

•      Total First Aid and Medical incidents

 

•      Chargeable Vehicle Accidents

              

 

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APPENDIX C

 

Interpolation of Performance and Payouts

 

Financial performance and payout is generally calculated by interpolation
between defined levels of performance. The table following is how the financial
interpolation would work in the Plan.

 

Actual EPS

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As a Percent

of Target

   Level of Payout as a % of Pay

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Level of

Performance

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   Grade Exempt 12
and Below Plus
All Nonexempt
and Bargaining
Unit Employees

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   Managers Grade
13-15

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   Executives 1

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                              Threshold                                       
                                                                   Target       
                                                                                
                  Maximum                                                      
                          

 

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Interpolation of Performance and Payouts cont.

 

    

As a Percent

of Target

   Level of Payout as a % of Pay

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Actual EPS

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Level of

Performance

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   Executives 2

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   Executives 3

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   CEO

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                              Threshold                                       
                                                                   Target       
                                                                                
                  Maximum                                                      
                          

 

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APPENDIX D

 

2005 Example Calculation

 

Employee Profile

   Performance Profile

Exempt Employee

   Corporate EPS: $____ (between threshold and target)

Low Risk

   Customer Satisfaction Score: ____ (at target)

Base Salary: $_________

   Safety: Target Level Performance

Target Opportunity %:         %

   Individual Performance: Top 20% Performer

 

Target Opportunity Award

 

__________    x    _________%    =    $__________

Eligible Pay

        Target Opp. %          

 

Financial Performance Award

 

$__________    x    _______%    x    _______%    =    $__________

Eligible Pay

        Fin. Perf. %         Weighting          

 

Operational Performance Award

 

$__________    x    ___________%    x    _________%    =    $__________

Eligible Pay

        Cust. Sat. Perf.         Weighting           $__________    x   
__________%    x    _________%    =    $__________

Eligible Pay

        Safety Perf.         Weighting          

 

Total Operational Performance Award    $__________

 

Total Award

 

[    $__________    +    $______________    =    $__________   ]    x   
____________    =    $___________      Fin, Award         Total Oper. Award     
   Total Award             Ind. Perf. Mult.        

Total