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                                                                  EXHIBIT 10.01

                             SETTLEMENT AGREEMENT

     This Settlement Agreement, dated as of February 24, 2000, is entered into
between the City of Las Cruces, New Mexico ("City") and El Paso Electric Company
("EPE") (collectively, "the Parties").

     WHEREAS, EPE has provided electric service in and around Las Cruces for
many years;

     WHEREAS, the City has undertaken an effort to condemn EPE's distribution
system in Las Cruces in order to complete the establishment of its municipal
electric utility serving all of Las Cruces;

     WHEREAS, the City and EPE, for many years, have been engaged in litigation
and regulatory proceedings in various courts and regulatory agencies concerning
the City's efforts, through the formation of a municipal electric utility, to
provide electric service to all of Las Cruces;

     WHEREAS, on February 21, 2000, representatives of the City and EPE reached
an agreement, pursuant to court-ordered and court-supervised settlement
negotiations, on the terms of a Settlement Proposal, attached hereto as Exhibit
A and made a part hereof by reference, subject to final approval by the City of
its Council ("City Council"), and the Board of Directors of EPE;

     WHEREAS, on February 24, 2000, the City Council, at a duly convened
meeting, gave final approval to the Settlement Proposal;

     WHEREAS, the Board of Directors of EPE gave final approval to the
Settlement Proposal;

     WHEREAS, the approved Settlement Proposal anticipates the preparation of  a
more detailed final writing reflecting its terms;

     WHEREAS, this Settlement Agreement constitutes that anticipated final
agreement;

     WHEREAS, on April 3, 2000, the City Council adopted, at a duly convened
meeting, an ordinance (a copy of which is attached hereto as Exhibit B)
approving the conveyance to EPE of the West Mesa Substation property and certain
other interests in real property currently owned by the City;

     WHEREAS, the City Council, at the same meeting of April 3, 2000, adopted an
ordinance (a copy of which is attached hereto as Exhibit C) granting EPE a
franchise;

     WHEREAS, the City Council has authorized the City's Staff to take all steps
necessary to implement and accomplish the provisions of Exhibit A, to execute
this Settlement Agreement on behalf of the City, and to execute the documents
provided for in this Settlement Agreement; and

     WHEREAS, the City and EPE desire to enter into this Settlement Agreement in
order to avoid further controversy between them and the incurrence of additional
costs of litigation.
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     NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the City and EPE (together the
"Parties") agree as follows:

     1.   Effective Date:  This Settlement Agreement shall become immediately
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effective as of the date it has been executed by duly authorized representatives
of both the City and EPE (the "Effective Date").  This Settlement Agreement may
be executed in multiple counterparts, each of which shall be an original, but
all of which together shall constitute one and the same Settlement Agreement.

     2.   Closing Date: The Closing Date for this Settlement Agreement shall be
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three (3) days after the Effective Date of this Settlement Agreement.

     3.   New Franchise Agreement:  The City Council adopted, at a duly convened
          -----------------------
meeting on April 3, 2000, an ordinance granting a franchise to EPE, which
franchise is attached hereto as Exhibit C.  On or before the Closing Date, EPE
agrees to execute the Franchise Ordinance attached hereto as Exhibit C.

     4.   Transfer of Ownership of City Electric Utility Assets And City
    --------------------------------------------------------------------
Electric Service Contracts:
--------------------------

          a)   On or before the Closing Date, the City shall do the following:

               (1)  Convey to EPE, free and clear of any and all encumbrances,
                    except those reservations contained in the patent and those
                    easements and restrictive covenants of record as shown in a
                    title policy to be obtained by the City, all of the City's
                    right, title and interest in the real property listed in
                    Exhibit D attached hereto. In connection with said title
                    policy, the City shall furnish at its expense a title policy
                    for the real property listed in Exhibit D in the amount of
                    $133,000.00, which policy shall contain only the usual
                    printed exceptions and exceptions for reservations in the
                    patent and any easements of record and restrictive covenants
                    of record as shown in the title policy. Prior to Closing,
                    the City will furnish to EPE a title binder in the above
                    amount. EPE at its own expense may eliminate any of the
                    usual printed exceptions which can be eliminated.

               (2)  Execute a Quitclaim Deed in favor of EPE conveying all of
                    the City's right, title and interest in the real property
                    listed in Exhibit D attached hereto, subject to reservations
                    in the patent, easements of record, and restrictive
                    covenants of record, if any, as shown in the title policy.

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               (3)  Take any and all steps necessary to release any lis pendens
                    placed on any real property subject to this Settlement
                    Agreement.

               (4)  Convey to EPE, free and clear of any and all encumbrances,
                    all of the City's right, title and interest in the personal
                    property listed in Exhibit E attached hereto. In connection
                    with said conveyance, the City shall execute a Bill of Sale
                    in favor of EPE for the personal property listed in Exhibit
                    E attached hereto.

               (5)  Convey to EPE all of the City's right, title and interest in
                    the easements, right of way grants, and temporary use
                    permits listed in Exhibit F, which Exhibit the City
                    represents includes all of the easements, right of way
                    grants, and temporary use permits from third parties that
                    the City has been using in connection with its municipal
                    electric utility. In connection with said conveyance, the
                    City shall execute an Assignment of the Easements, an
                    Assignment of Right of Way Grants and Temporary Use Permits,
                    and a Grant Of Easements to EPE for the easements and other
                    interests which are listed in Exhibit F attached hereto.

               (6)  Execute an Assignment of all customer contracts to EPE which
                    are listed in Exhibit G attached hereto. The City represents
                    and warrants that the contracts listed in Exhibit G
                    constitute all of its contracts to provide electric service,
                    and that all such contracts are in writing. The City has
                    also informed EPE that it has provided electric service to
                    certain customers (including certain City departments and
                    the airport) not pursuant to contracts with these customers,
                    and EPE has informed the City that it intends to charge
                    these customers EPE's tariffed rates.

               (7)  Deliver to EPE copies of (A) all books and records relating
                    to the real and personal property and easements listed in
                    Exhibits D, E and F attached hereto, and (B) all books and
                    records relating to the customer contracts listed in Exhibit
                    G attached hereto. In fulfilling this commitment, the City
                    shall deliver to EPE records sufficient to demonstrate that
                    the City expended no less than FOUR MILLION, FIVE HUNDRED
                    THOUSAND DOLLARS ($4,500,000.00) for the construction of the
                    West Mesa Substation and related facilities being conveyed
                    hereunder to EPE, an amount that the City warrants and
                    represents that it in fact expended for such construction.

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               (8)  Take any and all reasonable steps, including executing any
                    documents, that may be necessary or desirable promptly to
                    effectuate this transfer and assignment of property and
                    contracts.

          b)   The City represents and warrants each of the following as of the
               Effective Date and through the time of the conveyances and
               assignments required under this Settlement Agreement:

               (1)  The City (A) has good and marketable title in fee simple to
                    all real property listed in Exhibit D, and to all buildings,
                    structures and other improvements thereon, free and clear of
                    any and all encumbrances, except as shown in the title
                    policy to be obtained; (B) has good and marketable title to
                    all of the personal property and assets listed in Exhibit E,
                    free and clear of any and all encumbrances, and (C) upon
                    transfer to EPE of the real and personal property and assets
                    listed in Exhibits D and E, will thereby transfer to EPE
                    good and marketable title to said property and assets,
                    subject to no encumbrances, except as shown in the title
                    policy to be obtained.

               (2)  The City's municipal electric utility has complied with all
                    federal and state environmental laws applicable to the
                    property.

               (3)  The City has obtained all necessary environmental permits
                    applicable to the real property listed in Exhibit D, and any
                    such permits are in good standing and the City is in
                    compliance with all terms and conditions of such permits.

               (4)  The City is not aware of any ongoing investigation relating
                    to its municipal electric utility, or to any of the City
                    property that is the subject of the conveyances and
                    assignments required under this Settlement Agreement, by any
                    governmental agency concerning (A) any environmental law,
                    (B) any environmental remedial action, or (C) any claim of
                    losses or expenses arising from the release or threatened
                    release of a contaminant.

               (5)  The City is not aware, with respect to its municipal
                    electric utility or any of the property that is the subject
                    of the conveyances and assignments required under this
                    Settlement Agreement, of any judicial or administrative
                    proceeding, order, judgment, decree or settlement alleging
                    or addressing a violation of or liability under any
                    environmental law.

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               (6)  The City has not received any notice or claim from any
                    governmental agency with respect to its municipal electric
                    utility, or any of the property that is the subject of the
                    conveyances and assignments required under this Settlement
                    Agreement, to the effect that the City is or may be liable
                    to any person as a result of the release or threatened
                    release of a contaminant.

               (7)  The City is not aware of any environmental encumbrance that
                    has attached to the real property listed in Exhibit D or the
                    buildings, structures and other improvements thereon.

               (8)  There is no asbestos containing material which is on or part
                    of the real property listed in Exhibit D or the buildings,
                    structures and other improvements thereon.

          c)   The City will inform the customers listed in Exhibit G of its
               assignment of the City's rights in said contracts to EPE no later
               than the Closing Date.

          d)   EPE shall not assume or be responsible for any liability or
               obligation of the City relating to the property or customer
               contracts being conveyed or assigned hereunder (as listed in
               Exhibits D, E, F and G) arising from any act or omission prior to
               the Closing Date, whether such liability or obligation is direct
               or indirect, known or unknown, absolute or contingent. The City
               agrees to indemnify and hold harmless EPE from any and all
               claims, losses, expenses (including reasonable attorneys' fees),
               liabilities and obligations arising from any act or omission
               relating to the property or customer contracts being conveyed or
               assigned hereunder (as listed in Exhibits D, E, F and G)
               occurring prior to the Closing Date.

          e)   The City shall not assume or be responsible for any liability or
               obligation of EPE relating to the property or customer contracts
               being conveyed or assigned hereunder (as listed in Exhibits D, E,
               F and G) arising from any act or omission after the Closing Date,
               whether such liability or obligation is direct or indirect, known
               or unknown, absolute or contingent. EPE agrees to indemnify and
               hold harmless the City from any and all claims, losses, expenses
               (including reasonable attorneys' fees), liabilities, and
               obligations arising from any act or omission relating to the
               property or customer contracts being conveyed or assigned
               hereunder (as listed in Exhibits D, E, F and G) occurring after
               the Closing Date.

     5.   Taxes: The City shall be responsible for any taxes for any period
          -----
prior to the Closing Date attributable to the property and assets being conveyed
by the City pursuant to this Settlement Agreement. EPE shall be responsible for
any taxes for any

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period after the Closing Date attributable to the property and assets being
conveyed to EPE pursuant to this Settlement Agreement.

     6.   Payment by EPE: EPE shall pay to the City by wire transfer on the
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Closing Date the sum of TWENTY ONE MILLION DOLLARS ($21,000,000.00). The City,
prior to the Closing Date, will provide EPE with appropriate wiring
instructions.

     7.   Termination of Litigation and Regulatory Proceedings:
          ----------------------------------------------------

          a)   The Parties are currently involved in the following lawsuits and
               regulatory proceedings:

               (1)  EPE v. City, CIV-98-566, pending in the United States
                    -----------
                    District Court for the District of New Mexico, which is
                    consolidated with CIV-99-259, described hereinafter.

               (2)  City v. EPE, CIV-99-259, pending in the United States
                    -----------
                    District Court for the District of New Mexico, which is
                    consolidated with CIV-98-566, and which CIV-99-259,
                    described above.

               (3)  City v. EPE, SC-97-2-000, pending before the Federal Energy
                    -----------
                    Regulatory Commission ("FERC").

               (4)  EPE, OA96-200-000, pending before FERC.
                    ---

               (5)  SPS v. EPE, EL-98-44-000, pending before FERC.
                    ----------

               (6)  City v. EPE, EL-99-10-000, pending before FERC.
                    -----------

               (7)  EPE, OA-97-686-000, pending before FERC.
                    ---

          b)   The Parties agree to do the following on or before the Closing
               Date to terminate the lawsuits and regulatory matters pending
               between them:

               (1)  In CIV-98-0566, the Parties will execute and file with the
                    court a joint stipulation to voluntarily dismiss the case
                    without prejudice, each party to bear its own costs,
                    expenses and attorneys' fees.

               (2)  With respect to CIV-99-259, the Parties will take the
                    following actions in the federal district court and state
                    district court to dismiss the case and release to the City
                    the deposit, including interest thereon, that the City
                    deposited at the commencement of the case:

                    (A)  The Parties will first execute and file a joint motion

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                         for an order authorizing EPE and the City to file a
                         joint stipulated motion with the Third Judicial
                         District Court, State of New Mexico, County of Dona
                         Ana, stipulating that the THIRTY-SEVEN MILLION DOLLARS
                         ($37,000,000.00) deposited by the City on February 26,
                         1999, together with all interest accrued thereon, be
                         released and returned directly to the City, and
                         representing that the federal district court has
                         granted the Parties permission to request from the
                         Third Judicial District such a release of funds
                         directly to the City;

                    (B)  Upon receipt of an order from the federal district
                         court granting the Parties' joint motion as described
                         in the preceding subparagraph 7(b)(2)(A), the Parties
                         will execute and file a conforming joint stipulated
                         motion with the Third Judicial District Court, State of
                         New Mexico, County of Dona Ana; and present to the
                         State District Court an order closing Cause No. CV-99-
                         187 pending in the Third Judicial District, State of
                         New Mexico, and directing the Court Administrator to
                         pay to the City the sum of $37,000,000.00, plus accrued
                         interest.

                    (C)  Upon receipt of an order from the state district court
                         granting the Parties' joint motion as described in
                         subparagraph 7(b)(2)(B), the Parties will execute and
                         file a joint motion in federal court, Cause No. CV-99-
                         259, for an order dismissing the case without
                         prejudice, each party to bear its own costs, expenses
                         and attorneys' fees, provided, however, that the court
                         shall maintain jurisdiction for the limited purpose of
                         enforcing and resolving disputes regarding this
                         Settlement Agreement, as provided in paragraph 21(a) of
                         this Settlement Agreement. The Parties shall also
                         present to the federal court an order consistent with
                         the above joint motion.

               (3)  In SC-97-2-000, OA-96-200-000, EL-98-44-000, EL-99-10-000,
                    and OA-97-686-000, pending at FERC, the Parties will execute
                    and file with FERC the Joint Notice attached hereto as
                    Exhibit H. It is understood that the City has no
                    reponsibility for obtaining dismissal of any pending FERC
                    case or vacating of any FERC order other than submitting to
                    FERC the Joint Notice attached hereto as Exhibit H.

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     8.   City's Option to Purchase EPE's Distribution System:
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          a)   In paragraph 4 of Exhibit A attached hereto, EPE has granted, and
               does hereby grant, to the City an option to purchase the entirety
               of EPE's electric distribution system within the City of Las
               Cruces. This option is granted solely to the City and is not
               assignable by the City.

               (1)  The option herein granted must be exercised by the City
                    within a period commencing on April 30, 2007 and ending on
                    July 30, 2007. The City shall exercise this option by giving
                    notice in writing by certified mail, return receipt
                    requested, to EPE at 123 W. Mills, El Paso, Texas, 79901-
                    1341, or such other address as EPE shall hereafter provide
                    to the City in writing, such notice to be effective upon the
                    date of mailing of said notice by the City.

               (2)  The City shall be required to take possession of EPE's
                    electric distribution system within the City of Las Cruces
                    pursuant to an exercise of its option no later than the
                    later of (A) one year from the date it provides EPE notice
                    hereunder of its exercise of the option, and (B) sixty (60)
                    days after severance of the City's distribution system from
                    EPE's distribution system has been completed in accordance
                    with the provisions of subparagraph 8(a)(5) below. The City
                    shall provide in writing to EPE no less than thirty (30)
                    days' advance notice of the date on which it will take
                    possession of EPE's distribution system, provided, however,
                    that in no event shall the date of possession be prior to
                    completion of severance.

               (3)  The property subject to the City's option hereunder and
                    under Exhibit A shall constitute the following, and if the
                    City exercises the option it must do so with respect to all
                    such property:

                    (A)  the distribution system of EPE within the City of Las
                         Cruces as of the date the City takes possession of said
                         distribution system pursuant to the option herein,
                         including but not limited to all distribution lines and
                         substations within the City limits, all transmission
                         lines within the City limits of 115kv or above that are
                         necessary to operate the distribution system (subject
                         to receipt of all regulatory approvals necessary for
                         such conveyance), all real property on which such
                         distribution or transmission lines and substations are
                         located, and all fixtures on

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                         such real property;

                    (B)  all office buildings within the City of Las Cruces,
                         warehouses within the City of Las Cruces, (including
                         201 N. Water and 555 S. Compress, if owned by EPE at
                         the time of the City's exercise of its option)all real
                         property on which buildings are located, and all
                         fixtures on such real property;

                    (C)  all books and records used in the operation and
                         maintenance of the distribution system on the date the
                         City takes possession.

               (4)  In the event that the City exercises its option as provided
                    for in this paragraph, and EPE owns and controls the
                    transmission system in and around Las Cruces at that time,
                    EPE shall not require the City to pay any amount for such
                    transmission service in excess of EPE's applicable FERC
                    tariffed rates, which rates as applied to the City shall not
                    include any "stranded costs" resulting from the City's
                    exercise of its option. At the time of transfer of the
                    distribution assets, EPE's distribution company shall also
                    assign or transfer to the City any transmission or
                    generation contracts in effect to provide generation service
                    to customers within the City limits.

               (5)  After the exercise of said option, the City and EPE shall
                    jointly prepare a severance plan to sever the City's
                    distribution system from EPE's distribution system, which
                    plan shall provide for a complete severance (similar in
                    degree and scope of separation to the proposed severance
                    plan submitted by EPE to the New Mexico Public Regulatory
                    Commission in Case No. 2957 before the NMPRC) between the
                    two distribution systems.

                    (A)  After the exercise of the option, the City and EPE
                         shall immediately begin to work together to attempt to
                         prepare a joint severance plan. In the event that the
                         City and EPE are unable to agree on a joint severance
                         plan within ninety (90) days of the date of the mailing
                         of the City's notice of exercise of its option, the
                         City and EPE shall each designate within 15 days one
                         expert to assist in preparing a severance plan. Within
                         21 days of their appointment, the two experts shall
                         agree as to a third expert to assist in preparing such
                         severance plan. The severance plan shall be prepared
                         within

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                         90 days of the appointment of the third expert unless
                         the third expert determines that additional time is
                         required. The severance plan adopted shall be that plan
                         which is agreed to by the majority vote of the three
                         experts. Each party will pay one-half of the third
                         expert's fees and costs.

                    (B)  The City and EPE shall fully cooperate with each other
                         in the implementation of any severance plan. Because
                         severance will be for the purpose of enabling the City
                         to operate its own separate municipal electric utility,
                         all costs of construction, equipment, labor,
                         installation and repair necessary for implementation of
                         the severance plan shall be paid by the City.

               (6)  In the event the City exercises this option, the purchase
                    price shall be the book value (i.e., original cost less
                                                   ----
                    depreciation plus capital additions) of the EPE property
                    described in paragraphs 8(a)(3)(A) and (B) above, plus an
                    amount equal to thirty (30%) percent in excess of such book
                    value, as of the date the City provides notice of intent to
                    exercise the option. For property owned by EPE at the time
                    of the filing of its FERC Form 1 as of December 31, 2006
                    that has not been the subject of any subsequent capital
                    additions, the book value for such property to be used in
                    calculating the purchase price hereunder shall be the book
                    value used by EPE in connection with its FERC Form 1 filing.

                    (A)  The book value shall not include any stranded costs.

                    (B)  On July 31, 2006, EPE shall furnish to the City the
                         book value as of December 31, 2005 of that EPE property
                         subject to the option included in EPE's' most recent
                         FERC Form 1 filing.

                    (C)  The purchase price above provided for shall be due and
                         paid by the City by wire transfer, to an account
                         designated by EPE at the time, on or before the date
                         the City takes possession of the system.

               (7)  In the event the City exercises its option, the City will
                    not transfer, assign, convey, sell, lease, rent or otherwise
                    cede control of the distribution system to any other
                    corporation, person or entity for a period commencing two
                    (2) years from the date the City takes possession of said
                    system;

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                    provided, however, it is expressly understood and agreed
                    that the City may subcontract for operation and maintenance
                    of said system and may contract for wholesale purchase of
                    electricity, including wholesale purchases of electricity
                    from EPE if the Parties reach agreement for such wholesale
                    purchase.

               (8)  On the date possession of said system is conveyed to the
                    City pursuant to this option, EPE will:

                    (A)  Convey to the City, free and clear of all encumbrances,
                         except reservations contained in the patent, and those
                         easements and restrictive covenants of record as shown
                         in a title policy to be obtained by EPE, all of EPE's
                         right, title and interest in the real property
                         described in paragraph 8(a)(3) above. In connection
                         with said title policy, EPE shall furnish at its
                         expense a title policy for such real property in the
                         amount of the book value of such real property plus 30%
                         (calculated the same as for the purpose of calculating
                         the option purchase price hereunder), which policy
                         shall contain only the usual printed exceptions and
                         exceptions for reservation in the patent and any
                         easements of record and restrictive covenants of record
                         as shown in the title policy. EPE will furnish to the
                         City a title binder in such amount. The City at its own
                         expense may eliminate any of the usual printed
                         exceptions which can be eliminated.

                    (B)  Execute a Quitclaim Deed in favor of the City conveying
                         all of EPE's right, title and interest in the real
                         property described in paragraph 8(b)(3) above, subject
                         to reservations in the patent, easements of record, and
                         restrictive covenants of record, if any, as shown in
                         the title policy.

                    (C)  Execute a Bill of Sale in favor of the City for the
                         personal property described in paragraph 8(b)(3) above.

                    (D)  Execute an Assignment of Easements to the City for all
                         easements belonging to EPE in the real property
                         described in paragraph 8(b)(3) above.

                    (E)  EPE's distribution company shall execute an Assignment
                         to the City of all customer contracts for

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                         the provision of electricity in the City of Las Cruces.

                    (F)  Deliver to the City copies of all books and records
                         relating to the real and personal property described in
                         paragraph 8(b)(3) above, and all books and records
                         relating to the customer contracts referred to in the
                         preceding subparagraph.

                    (G)  Take any and all reasonable steps, including executing
                         any documents, that may be necessary or desirable
                         promptly to effectuate such transfer and assignment of
                         property and contracts.

               (9)  In connection with the exercise of this option, EPE, at the
                    time of the conveyance of the property subject to the
                    option, shall represent and warrant with respect to the
                    property being conveyed as follows, unless EPE notifies the
                    City to the contrary at the time of the conveyance:

                    (A)  EPE (i) has good and marketable title in fee simple to
                         all conveyed real property, and to all buildings,
                         structures and other improvements thereon, free and
                         clear of any and all encumbrances, except as shown in
                         the title policy to be obtained; (ii) has good and
                         marketable title to all of the other personal property
                         and assets to be conveyed, free and clear of any and
                         all encumbrances, and (iii) upon transfer to the City
                         of the real and personal property and assets, will
                         thereby transfer to the City good and marketable title
                         to the property and assets, subject to no encumbrances,
                         except as shown in the title policy to be obtained.

                    (B)  EPE has complied with all federal and state
                         environmental laws applicable to the property.

                    (C)  EPE has obtained all necessary environmental permits
                         applicable to the real property, and all such permits
                         are in good standing and EPE is in compliance with all
                         terms and conditions of such permits.

                    (D)  EPE is not aware of any ongoing investigation by any
                         governmental agency relating to the property to be
                         conveyed concerning (i) any environmental law, (ii) any
                         environmental remedial action, or (iii) any

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                         claim of losses or expenses arising from the release or
                         threatened release of a contaminant.

                    (E)  EPE is not aware, with respect to the property to be
                         conveyed of any judicial or administrative proceeding,
                         order, judgment, decree or settlement alleging or
                         addressing a violation of or liability under any
                         environmental law.

                    (F)  EPE has not received any notice or claim from any
                         governmental agency with respect to the property to be
                         conveyed to the effect that it is or may be liable to
                         any person as a result of the release or threatened
                         release of a contaminant.

                    (G)  EPE is not aware of any environmental encumbrance that
                         has attached to the real property to be conveyed, or to
                         the buildings, structures and other improvements
                         thereon.

                    (H)  There is no asbestos containing material which is on or
                         part of the real property to be conveyed or the
                         buildings, structures and other improvements thereon.

               (10) At the time of conveyance pursuant to the option, the City
                    shall not assume or be responsible for any liability or
                    obligation of EPE in connection with the property being
                    conveyed incurred prior to the date of conveyance, whether
                    such liability or obligation is direct or indirect, known or
                    unknown, absolute or contingent, and EPE agrees to indemnify
                    and hold harmless the City from any and all losses and
                    expenses, including reasonable attorneys' fees, liabilities
                    and obligations arising from any act or omission occurring
                    prior to the date of conveyance.

               (11) EPE shall not be responsible for any liability or obligation
                    of the City, direct or indirect, known or unknown, absolute
                    or contingent, that arises after the date of conveyance
                    pursuant to said option, and the City agrees to indemnify
                    and hold harmless EPE from any losses and expenses,
                    including reasonable attorneys' fees, liabilities and
                    obligations arising from any act or omission occurring prior
                    to the date of conveyance.

               (12) EPE shall be responsible for any taxes attributable to EPE's
                    ownership of the property and assets transferred pursuant to

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                    this Settlement Agreement to the City, which taxes accrue up
                    to the date of conveyance pursuant to this option and which
                    taxes arise from EPE's ownership of the property conveyed or
                    the electric service provided. The City will be responsible
                    for all taxes from the date of conveyance pursuant to the
                    option and thereafter in connection with the property
                    transferred pursuant to said option and the providing of
                    electric service by the City after conveyance pursuant to
                    the option.

     9.   City's Agreement to Forego Municipalization Efforts:
          ---------------------------------------------------

          a)   The City promises, covenants, and agrees that the City will take
               no actions or engage in any negotiations prior to April 30, 2009
               (1) to purchase, condemn, or otherwise acquire any part of the
               electric distribution system owned by EPE, its successors, or
               assigns, (2) to construct its own electric distribution system,
               or (3) to establish a municipal electric utility, except as
               provided in paragraph 8 of this Settlement Agreement.

          b)   Nothing in subparagraph 9(a) above is intended to alter any
               rights that the City may have, to the extent provided by law, to
               take advantage of retail wheeling and to be an aggregator.

     10.  City's Participation in New Mexico Stranded Cost Case: The City agrees
          -----------------------------------------------------
that, in any future proceeding at the New Mexico Public Regulatory Commission
("NMPRC") to determine the amount of EPE's stranded costs attributable to EPE's
service in Las Cruces, the City shall not contest or oppose EPE's estimate of
its stranded costs, provided that the City may contest or oppose EPE's estimate
only if, and only to the extent that, EPE's estimate exceeds the amount
determined by the FERC in its May 26 Order in City of Las Cruces v. El Paso
Elec. Co., No. SC-97-2-000, including the FERC's determination that the stranded
cost amount was $52.9 million as of July 1, 1999 and has declined in time on a
daily basis since July 1, 1999. This Paragraph shall not apply to any NMPRC
proceeding that is unrelated to the determination of EPE's stranded costs. EPE
will notify the City in writing of any proceeding before the NMPRC which
involves issues of EPE's stranded cost attributable to EPE's service in Las
Cruces.

     11.  City's Release of EPE:  The City, for itself and its successors and
          ---------------------
assigns, hereby releases and discharges EPE, its subsidiaries, successors,
predecessors and assigns, and their respective officers, directors, agents,
employees, consultants, attorneys and legal representatives, from any and all
claims, demands, causes of action, obligations, damages and liabilities of any
nature whatsoever, whether now known or unknown, arising from or relating in any
way to the City's past efforts to form a municipal electric utility, past
franchise agreements between the Parties, EPE's past use of right-of-ways to
provide electricity, or any acts or omissions that may have been subject to any
regulatory proceeding or litigation between the Parties; provided, however, that
up to and through April 30, 2000, EPE shall have a continuing obligation to pay
the two (2) percent fees of

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<PAGE>

gross revenue for use of City right-of-ways presently being paid.

     12.  EPE's Release of the City: EPE, for itself and its successors and
          -------------------------
assigns, hereby releases and discharges the City, its successors, predecessors
or assigns, and its City Council, officers, employees, consultants, attorneys
and legal representatives, from any and all claims, demands, causes of action,
obligations, damages and liabilities of any nature whatsoever, whether now known
or unknown, arising in any way from EPE's opposition to the City's formation of
a municipal electric utility, the City's past effort to form an electric
utility, the past franchise agreements between the Parties, the City's
opposition to EPE's use of right-of-ways, or any act or omission that has been
the subject of any regulatory proceeding or litigation between the Parties.

     13.  Authority to Execute Agreement: The individuals executing this
          ------------------------------
Settlement Agreement on behalf of the City and EPE each represent that they have
read and understand the terms of this Settlement Agreement, that they have had
the benefit and advice of counsel of their choice in the negotiation and
execution of this Settlement Agreement, and that they possess full power and
authority to execute and deliver the Settlement Agreement on behalf of the
stated Parties.

     14.  No Admission of Liability:  Nothing herein shall be construed as a
          -------------------------
determination or admission by any party of any liability or wrongdoing, or as a
determination or admission by any party of any issue of fact or law previously
in dispute between the Parties.

     15.  Breaches of Representations: Each party recognizes that one party's
          ---------------------------
breach of any of the representations and warranties contained in this Settlement
Agreement will cause damage to the other party, and thus agrees to compensate,
indemnify and hold harmless the other party for any breach of any representation
or warranty.

     16.  Entire Agreement:  This Settlement Agreement, including the exhibits
          ----------------
attached hereto, embodies the entire agreement between the Parties concerning
the matters dealt with herein and supersedes any and all prior agreements or
understandings as may relate to the matters dealt with herein.

     17.  Amendment: This Settlement Agreement may be amended only by an
          ---------
instrument in writing executed by both Parties.

     18.  Governing Law:  This Settlement Agreement shall be governed by and
          -------------
construed under the laws of the State of New Mexico.

     19.  Successors: This Settlement Agreement is binding on EPE's successors
          ----------
and assigns, and on the City's successors.

     20.  Partial Invalidity: Whenever possible, each provision of this
          ------------------
Settlement Agreement hereof shall be interpreted in such manner as to be
effective and valid under applicable law, but in case any one or more of the
provisions contained herein shall, for any reason, be held to be invalid,
illegal, or unenforceable in any respect, such provision

                                       15
<PAGE>

shall be ineffective to the extent, but only to the extent, of such invalidity,
illegality, or unenforceability without invalidating the remainder of such
invalid, illegal, or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.

     21.  Dispute Resolution:
          ------------------

          a)   The Parties agree that the United States District Court for the
               District of New Mexico shall retain jurisdiction pursuant to this
               Settlement Agreement for a period of one year from the Effective
               Date for the purpose of enforcing this Settlement Agreement or
               adjudicating any dispute arising out of, or relating to, this
               Settlement Agreement.

          b)   With respect to any dispute between the Parties arising out of or
               relating to this Settlement Agreement that arises more than one
               year after the Effective Date, a party seeking resolution of such
               dispute shall provide written notice to the other party
               describing the existence and nature of the dispute. The Parties
               shall then attempt to resolve the dispute within thirty (30) days
               of such written notice by good faith negotiation. If the Parties
               are unable to resolve a dispute by negotiation within thirty (30)
               days, or such additional time as the Parties mutually agree is
               appropriate to continue their efforts, the Parties shall submit
               the dispute to binding arbitration before an arbitrator mutually
               agreeable to the Parties who shall have expertise in the area of
               dispute. In order to select the arbitrator, each party shall
               submit to the other, no later than fourteen (14) days after the
               termination of the negotiation period, a list of three proposed
               arbitrators. Within seven (7) days thereafter, each party shall
               respond to the other's list, indicating which of the proposed
               arbitrators, if any, is acceptable. If more than one of the
               proposed arbitrators is accepted, the Parties shall attempt to
               reach an agreement regarding which of the accepted arbitrators is
               to be selected; if the Parties are unable to so agree within
               three (3) business days, one of the accepted arbitrators shall be
               selected by lot. If none of the arbitrators on the Parties' lists
               is accepted by the other party, the Parties shall repeat the
               process. If the Parties remain unable to agree on an arbitrator
               at that time, they shall submit the dispute to binding
               arbitration administered by the American Arbitration Association,
               in accordance with its Commercial Rules.

          c)   Judgment on any award rendered in an arbitration proceeding held
               pursuant to paragraph 21(b) above may be entered in any court
               having jurisdiction thereof. The arbitrator shall have the
               authority to award any remedy or relief that a court of competent
               jurisdiction could order or grant, including the issuance of a
               mandatory

                                       16
<PAGE>

               injunction, with the exception that punitive, exemplary or other
               noncompensatory damages may not be awarded.

                                       17
<PAGE>

     IN WITNESS OF THE ABOVE, the Parties have executed this Settlement
Agreement as of the date(s) indicated below.


                                        CITY OF LAS CRUCES

                                        By  /s/ James A. Ericson
                                            -------------------------
                                            James A. Ericson, Interim
                                            City Manager

APPROVED AS TO FORM:

By  /s/ Fermin Rubio
  -------------------
        City Attorney


                                        EL PASO ELECTRIC COMPANY

                                        By  /s/ James S. Haines
                                            --------------------------
                                            James S. Haines, President

                                       18
<PAGE>

STATE OF NEW MEXICO           )

                       ss.:

County of DONA ANA            )


     This instrument was acknowledged before me this 3rd day of May, 2000, by
James A. Ericson, Interim City Manager, City of Las Cruces.

                                        /s/ Sandra H. Hiss
                                        -------------------------------
                                        Notary Public
                                        My Commission Expires:  8-25-01

                                       19
<PAGE>

STATE OF TEXAS                )

                       ss.:

County of EL PASO             )


     This instrument was acknowledged before me this 3rd day of May, 2000, by
James S. Haines, President of El Paso Electric Company.

                                        /s/ Carolina Pena
                                        ---------------------------------
                                        Notary Public
                                        My Commission Expires: 03-24-2003

                                       20