Document:

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                                                                   Exhibit 10.26

                           EL PASO ELECTRIC COMPANY
                            STOCK OPTION AGREEMENT
                                 FOR EMPLOYEES
                           (INCENTIVE STOCK OPTIONS)

     El Paso Electric Company, a Texas corporation (the "Company"), hereby
                                                         -------
grants to James S. Haines, Jr. (the "Optionee") as of December 15, 2000 (the
"Option Date"), pursuant to the provisions of the El Paso Electric Company 1999
 -----------
Long-Term Incentive Plan (the "Plan"), an incentive stock option to purchase
                               ----
from the Company (the "Option") 15,872 shares of its Common Stock, no par value
("Stock"), at the price of $12.60 per share upon and subject to the terms and
  -----
conditions set forth below.

     1.    Option Subject to Acceptance of Agreement.  The Option shall be null
           -----------------------------------------
and void unless the Optionee shall accept this Agreement by executing it in the
space provided below and returning such original execution copy to the Company.

     2.    Time and Manner of Exercise of Option.
           -------------------------------------

     2.1.  Maximum Term of Option.  In no event may the Option be exercised, in
           ----------------------
whole or in part, after December 15, 2010 (the "Expiration Date").
                                                ---------------

     2.2.  Exercise of Option.  (a)  Except as otherwise provided by Section
           ------------------
2.2(b) hereof and by Section 6.8 of the Plan, the Option shall vest and become
exercisable ratably over a two (2) year period from the date hereof as follows:

     Date Exercisable                Amount Exercisable
     ----------------                ------------------
      April 30, 2002                        7,936
      April 30, 2003                        7,936

     (b) The Option shall vest and immediately become exercisable in full on the
effective date of employment by the Company of a new Chief Executive Officer.

     (c) If the Optionee's employment by the Company terminates by reason of
"Total Disability", the Option may thereafter be exercised (to the extent that
such Option is exercisable on the effective date of the Optionee's termination
of employment) by the Optionee or the Optionee's Legal Representative until and
including the earliest to occur of (i) the date which is 120 days after the
effective date of the Optionee's termination of employment and (ii) the
Expiration Date.

     (d) If the Optionee's employment by the Company terminates by reason of
voluntary retirement, the Option may thereafter be exercised (to the extent that
such Option is exercisable on the effective date of the Optionee's termination
of employment) by the Optionee or the Optionee's Legal Representative until and
including the earliest to occur of (i) the date which is 120 days after the
effective date of the Optionee's termination of employment and (ii) the
Expiration Date.

     (e) If the Optionee's employment by the Company terminates by reason of
death, the Option may thereafter be exercised (to the extent that such Option is
<PAGE>

exercisable on the Optionee's date of death) by the Optionee or the Optionee's
Legal Representative or Permitted Transferees, as the case may be, until and
including the earliest to occur of (i) the date which is 120 days after the date
of death and (ii) the Expiration Date.

     (f) If the Optionee's employment by the Company terminates for any reason
other than "Total Disability", retirement or death, the Option may thereafter be
exercised (to the extent such Option is exercisable on the effective date of the
Optionee's termination of employment) by the Optionee or the Optionee's Legal
Representative until and including the earliest to occur of (i) the date which
is 120 days after the effective date of the Optionee's termination of employment
and (ii) the Expiration Date.

     (g) If the Optionee dies during the period set forth in Section 2.2(c)
following termination of employment by reason of "Total Disability", or if the
Optionee dies during the period set forth in Section 2.2(d) following
termination of employment, by reason of voluntary retirement, or if the Optionee
dies during the period set forth in Section 2.2(f) following termination of
employment for any reason other than "Total Disability" or retirement, the
Option may thereafter be exercised by the Optionee's Legal Representative or
Permitted Transferees, as the case may be, until and including the earliest to
occur of (i) the date which is 120 days after the date of death and (ii) the
Expiration Date.

     2.3   Method of Exercise.  Subject to the limitations set forth in this
           ------------------
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Company specifying the number of whole shares of Stock to be
purchased and accompanied by payment therefor in full (or arrangement made for
such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and for which the Optionee has good title, free and
clear of all liens and encumbrances) having a Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable pursuant
to the Option by reason of such exercise, (iii) in cash by a broker-dealer
acceptable to the Company to whom the Optionee has submitted an irrevocable
notice of exercise or (iv) a combination of (i) and (ii), and (2) by executing
such documents as the Company may reasonably request.  The Committee may
disapprove an election pursuant to any of clauses (ii) - (iv) if the Committee
determines, based on the opinion of recognized securities counsel, that the
method of exercise so elected would result in liability to the Optionee under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the regulations promulgated thereunder.  Any fraction of a share of
Stock which would be required to pay such purchase price shall be disregarded
and the remaining amount due shall be paid in cash by the Optionee.  No
certificate representing a share of Stock shall be delivered until the full
purchase price therefor has been paid.

     2.4   Termination of Option.  (a)  In no event may the Option be exercised
           ---------------------
after it terminates as set forth in this Section 2.4. The Option shall
terminate,

                                      -2-
<PAGE>

to the extent not exercised pursuant to Section 2.3 or earlier terminated
pursuant to Section 2.2, on the Expiration Date.

     (b) In the event that rights to purchase all or a portion of the shares of
Stock subject to the Option expire or are exercised, cancelled or forfeited, the
Optionee shall, upon the Company's request, promptly return this Agreement to
the Company for full or partial cancellation, as the case may be. Such
cancellation shall be effective regardless of whether the Optionee returns this
Agreement. If the Optionee continues to have rights to purchase shares of Stock
hereunder, the Company shall, within 10 days of the Optionee's delivery of this
Agreement to the Company, either (i) mark this Agreement to indicate the extent
to which the Option has expired or been exercised, cancelled or forfeited or
(ii) issue to the Optionee a substitute option agreement applicable to such
rights, which agreement shall otherwise be substantially similar to this
Agreement in form and substance.

     2.5   Dividend Equivalents. The Company hereby grants to Optionee 15,872
           --------------------
dividend equivalents (the "Dividend Equivalents"). Each Dividend Equivalent
shall entitle Optionee to receive a cash payment on each dividend payment date
after December 15, 2000 equal to the product of (i) of the amount any dividend
declared with respect to a share of Stock and (ii) the number of shares of Stock
subject to unexercised Non-Qualified Options hereunder that have not expired or
terminated on the date of payment of such dividend.

     3.    Additional Terms and Conditions of Option.
           -----------------------------------------

     3.1.  Nontransferability of Option.  The Option may not be transferred by
           ----------------------------
the Optionee other than (i) by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by the Company or (ii)
as otherwise permitted under Rule 16b-3 under the Exchange Act as may be set
forth in an amendment to this Agreement. Except to the extent permitted by the
foregoing sentence, during the Optionee's lifetime the Option is exercisable
only by the Optionee or the Optionee's Legal Representative. Except to the
extent permitted by the foregoing, the Option may not be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate,
encumber or otherwise dispose of the Option, the Option and all rights hereunder
shall immediately become null and void.

     3.2.  Investment Representation.  The Optionee hereby represents and
           -------------------------
covenants that (a) any share of Stock purchased upon exercise of the Option will
be purchased for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
                                                                   ----------
Act"), unless such purchase has been registered under the Securities Act and any
---
applicable state securities laws; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Optionee shall submit a written
statement, in form satisfactory to the Company, to the

                                      -3-
<PAGE>

effect that such representation (x) is true and correct as of the date of
purchase of any shares hereunder or (y) is true and correct as of the date of
any sale of any such shares, as applicable. As a further condition precedent to
any exercise of the Option, the Optionee shall comply with all regulations and
requirements of any regulatory authority having control of or supervision over
the issuance or delivery of the shares and, in connection therewith, shall
execute any documents which the Board or the Committee shall in its sole
discretion deem necessary or advisable.

     3.3.  Withholding Taxes.  (a)  As a condition precedent to the delivery of
           -----------------
Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
                                        ---------------------
such exercise of the Option. If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.

     (b) The Optionee may elect to satisfy his or her obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment to the
Company pursuant to Section 3.3(a), (2) delivery to the Company of previously
owned whole shares of Stock (which the Optionee has held for at least six months
prior to the delivery of such shares or which the Optionee purchased on the open
market and for which the Optionee has good title, free and clear of all liens
and encumbrances) having a Fair Market Value, determined as of the date the
obligation to withhold or pay taxes first arises in connection with the Option
(the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the
      --------
Company to withhold whole shares of Stock which would otherwise be delivered to
the Optionee upon exercise of the Option having a Fair Market Value, determined
as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a
broker-dealer acceptable to the Company to whom the Optionee has submitted an
irrevocable notice of exercise or (5) any combination of (1), (2) and (3). The
Committee may disapprove an election pursuant to any of clauses (2)-(5) if the
Committee determines, based on the opinion of recognized securities counsel,
that the method so elected would result in liability to the Optionee under
Section 16(b) of the Exchange Act or the regulations promulgated thereunder.
Shares of Stock to be delivered or withheld may not have a Fair Market Value in
excess of the minimum amount of the Required Tax Payments. Any fraction of a
share of Stock which would be required to satisfy any such obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Optionee.
No certificate representing a share of Stock shall be delivered until the
Required Tax Payments have been satisfied in full.

     3.4   Adjustment.  In the event of any stock split, stock dividend,
           ----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee
without an increase in the aggregate purchase price. If any adjustment would
result in a fractional security being subject to the Option,

                                      -4-
<PAGE>

the Company shall pay the Optionee, in connection with the first exercise of the
Option, in whole or in part, occurring after such adjustment, an amount in cash
determined by multiplying (i) the fraction of such security (rounded to the
nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on
the exercise date over (B) the exercise price of the Option. The decision of the
Committee regarding any such adjustment shall be final, binding and conclusive.

     3.5.  Compliance with Applicable Law.  The Option is subject to the
           ------------------------------
condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the purchase
or delivery of shares hereunder, the Option may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company.  The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.

     3.6.  Delivery of Certificates.  Upon the exercise of the Option, in whole
           ------------------------
or in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.3.

     3.7.  Option Confers No Rights as Stockholder.  The Optionee shall not be
           ---------------------------------------
entitled to any privileges of ownership with respect to shares of Stock subject
to the Option unless and until purchased and delivered upon the exercise of the
Option, in whole or in part, and the Optionee becomes a stockholder of record
with respect to such delivered shares; and the Optionee shall not be considered
a stockholder of the Company with respect to any such shares not so purchased
and delivered.

     3.8.  Option Confers No Rights to Continued Employment.  In no event shall
           ------------------------------------------------
the granting of the Option or its acceptance by the Optionee give or be deemed
to give the Optionee any right to continued employment by the Company.

     3.9.  Decisions of Board or Committee.  The Board or the Committee shall
           -------------------------------
have the right to resolve all questions which may arise in connection with the
Option or its exercise. Any interpretation, determination or other action made
or taken by the Board or the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.

     3.10. Company to Reserve Shares.  The Company shall at all times prior to
           -------------------------
the expiration or termination of the Option reserve and keep available, either
in its treasury or out of its authorized but unissued shares of Stock, the full
number of shares subject to the Option from time to time.

                                      -5-
<PAGE>

     3.11. Agreement Subject to the Plan.  This Agreement is subject to the
           -----------------------------
provisions of the Plan and shall be interpreted in accordance therewith. The
Optionee hereby acknowledges receipt of a copy of the Plan.

     4.    Miscellaneous Provisions.
           ------------------------

     4.1.  Designation as Incentive Stock Option.  The Option is hereby
           -------------------------------------
designated as constituting an "incentive stock option" within meaning of section
422 of the Internal Revenue Code of 1986, as amended (the "Code"); this
Agreement shall be interpreted and treated consistently with such designation.

     4.2.  Meaning of Certain Terms.  As used herein, the term "Legal
           ------------------------                             -----
Representative" shall include an executor, administrator, legal representative,
--------------
guardian or similar person and the term "Permitted Transferee" shall include any
                                         --------------------
transferee (i) pursuant to a transfer permitted under Section 6.4 of the Plan
and Section 3.1 hereof or (ii) designated pursuant to beneficiary designation
procedures approved by the Company.

     4.3.  Successors.  This Agreement shall be binding upon and inure to the
           ----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Optionee, acquire any rights hereunder in
accordance with this Agreement or the Plan.

     4.4.  Notices.  All notices, requests or other communications provided for
           -------
in this Agreement shall be made, if to the Company, to Kayser Building, 100
North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to
the Optionee, to 5712 Mira Grande, El Paso, TX 79912. All notices, requests or
other communications provided for in this Agreement shall be made in writing
either (a) by personal delivery to the party entitled thereto, (b) by facsimile
with confirmation of receipt, (c) by mailing in the United States mails to the
last known address of the party entitled thereto or (d) by express courier
service. The notice, request or other communication shall be deemed to be
received upon personal delivery, upon confirmation of receipt of facsimile
transmission or upon receipt by the party entitled thereto if by United States
mail or express courier service; provided, however, that if a notice, request or
other communication is not received during regular business hours, it shall be
deemed to be received on the next succeeding business day of the Company.

     4.5.  Governing Law.  This Agreement, the Option and all determinations
           -------------
made and actions taken pursuant hereto and thereto, to the extent not governed
by the laws of the United States, shall be governed by the laws of the State of
Texas and construed in accordance therewith without giving effect to principles
of conflicts of laws.

                                      -6-
<PAGE>

     4.6.  Counterparts.  This Agreement may be executed in two counterparts
           ------------
each of which shall be deemed an original and both of which together shall
constitute one and the same instrument.

                                        EL PASO ELECTRIC COMPANY

                                        By: /s/ KENNETH R. HEITZ
                                           ----------------------------
                                        Name: Kenneth R. Heitz
                                        Title: Director

Accepted this 8th day of February, 2001.

 /s/ JAMES S. HAINES, JR.
-------------------------------
     James S. Haines, Jr.

                                      -7-
<PAGE>

                           EL PASO ELECTRIC COMPANY
                            STOCK OPTION AGREEMENT
                                 FOR EMPLOYEES
                         (NON-QUALIFIED STOCK OPTIONS)

     El Paso Electric Company, a Texas corporation (the "Company"), hereby
                                                         -------
grants to James S. Haines, Jr. (the "Optionee") as of December 15, 2000 (the
"Option Date"), pursuant to the provisions of the El Paso Electric Company 1999
 -----------
Long-Term Incentive Plan (the "Plan"), a non-qualified option to purchase from
                               ----
the Company (the "Option") 134,128 shares of its Common Stock, no par value
("Stock"), at the price of $12.60 per share upon and subject to the terms and
  -----
conditions set forth below.

     1.    Option Subject to Acceptance of Agreement.  The Option shall be null
           -----------------------------------------
and void unless the Optionee shall accept this Agreement by executing it in the
space provided below and returning such original execution copy to the Company.

     2.    Time and Manner of Exercise of Option.
           -------------------------------------

     2.1.  Maximum Term of Option.  In no event may the Option be exercised, in
           ----------------------
whole or in part, after December 15, 2010 (the "Expiration Date").
                                                ---------------

     2.2.  Exercise of Option.  (a)  Except as otherwise provided by Section
           ------------------
2.2(b) hereof and by Section 6.8 of the Plan, the Option shall vest and become
exercisable ratably over a two (2) year period from the date hereof as follows:

     Date Exercisable                 Amount Exercisable
     ----------------                 ------------------
      April 30, 2002                        67,064
      April 30, 2003                        67,064

     (b) The Option shall vest and immediately become exercisable in full on the
effective date of employment by the Company of a new Chief Executive Officer.

     (c) If the Optionee's employment by the Company terminates by reason of
"Total Disability", the Option may thereafter be exercised (to the extent that
such Option is exercisable on the effective date of the Optionee's termination
of employment) by the Optionee or the Optionee's Legal Representative until and
including the earliest to occur of (i) the date which is 120 days after the
effective date of the Optionee's termination of employment and (ii) the
Expiration Date.

     (d) If the Optionee's employment by the Company terminates by reason of
voluntary retirement, the Option may thereafter be exercised (to the extent that
such Option is exercisable on the effective date of the Optionee's termination
of employment) by the Optionee or the Optionee's Legal Representative until and
including the earliest to occur of (i) the date which is 120 days after the
effective date of the Optionee's termination of employment and (ii) the
Expiration Date.

     (e) If the Optionee's employment by the Company terminates by reason of
death, the Option may thereafter be exercised (to the extent that such Option is
<PAGE>

exercisable on the Optionee's date of death) by the Optionee or the Optionee's
Legal Representative or Permitted Transferees, as the case may be, until and
including the earliest to occur of (i) the date which is 120 days after the date
of death and (ii) the Expiration Date.

     (f) If the Optionee's employment by the Company terminates for any reason
other than "Total Disability", retirement or death, the Option may thereafter be
exercised by (to the extent such Option is exercisable on the effective date of
the Optionee's termination of employment) the Optionee or the Optionee's Legal
Representative until and including the earliest to occur of (i) the date which
is 120 days after the effective date of the Optionee's termination of employment
and (ii) the Expiration Date.

     (g) If the Optionee dies during the period set forth in Section 2.2(c)
following termination of employment by reason of "Total Disability", or if the
Optionee dies during the period set forth in Section 2.2(d) following
termination of employment, by reason of voluntary retirement, or if the Optionee
dies during the period set forth in Section 2.2(f) following termination of
employment for any reason other than "Total Disability" or retirement, the
Option may thereafter be exercised by the Optionee's Legal Representative or
Permitted Transferees, as the case may be, until and including the earliest to
occur of (i) the date which is 120 days after the date of death and (ii) the
Expiration Date.

     2.3   Method of Exercise.  Subject to the limitations set forth in this
           ------------------
Agreement, the Option may be exercised by the Optionee (1) by giving written
notice to the Company specifying the number of whole shares of Stock to be
purchased and accompanied by payment therefor in full (or arrangement made for
such payment to the Company's satisfaction) either (i) in cash, (ii) by delivery
of previously owned whole shares of Stock (which the Optionee has held for at
least six months prior to the delivery of such shares or which the Optionee
purchased on the open market and for which the Optionee has good title, free and
clear of all liens and encumbrances) having a Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable pursuant
to the Option by reason of such exercise, (iii) in cash by a broker-dealer
acceptable to the Company to whom the Optionee has submitted an irrevocable
notice of exercise or (iv) a combination of (i) and (ii), and (2) by executing
such documents as the Company may reasonably request.  The Committee may
disapprove an election pursuant to any of clauses (ii) - (iv) if the Committee
determines, based on the opinion of recognized securities counsel, that the
method of exercise so elected would result in liability to the Optionee under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the regulations promulgated thereunder. Any fraction of a share of
Stock which would be required to pay such purchase price shall be disregarded
and the remaining amount due shall be paid in cash by the Optionee. No
certificate representing a share of Stock shall be delivered until the full
purchase price therefor has been paid.

     2.4   Termination of Option.  (a)  In no event may the Option be exercised
           ---------------------
after it terminates as set forth in this Section 2.4. The Option shall
terminate,

                                      -2-
<PAGE>

to the extent not exercised pursuant to Section 2.3 or earlier terminated
pursuant to Section 2.2, on the Expiration Date.

     (b) In the event that rights to purchase all or a portion of the shares of
Stock subject to the Option expire or are exercised, cancelled or forfeited, the
Optionee shall, upon the Company's request, promptly return this Agreement to
the Company for full or partial cancellation, as the case may be. Such
cancellation shall be effective regardless of whether the Optionee returns this
Agreement. If the Optionee continues to have rights to purchase shares of Stock
hereunder, the Company shall, within 10 days of the Optionee's delivery of this
Agreement to the Company, either (i) mark this Agreement to indicate the extent
to which the Option has expired or been exercised, cancelled or forfeited or
(ii) issue to the Optionee a substitute option agreement applicable to such
rights, which agreement shall otherwise be substantially similar to this
Agreement in form and substance.

     2.5   Dividend Equivalents. The Company hereby grants to Optionee 134,128
           --------------------
dividend equivalents (the "Dividend Equivalents"). Each Dividend Equivalent
shall entitle Optionee to receive a cash payment on each dividend payment date
after December 15, 2000 equal to the product of (i) of the amount any dividend
declared with respect to a share of Stock and (ii) the number of shares of Stock
subject to unexercised Non-Qualified Options hereunder that have not expired or
terminated on the date of payment of such dividend.

     3.    Additional Terms and Conditions of Option.
           -----------------------------------------

     3.1.  Nontransferability of Option.  The Option may not be transferred by
           ----------------------------
the Optionee other than (i) by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by the Company or (ii)
as otherwise permitted under Rule 16b-3 under the Exchange Act as may be set
forth in an amendment to this Agreement. Except to the extent permitted by the
foregoing sentence, during the Optionee's lifetime the Option is exercisable
only by the Optionee or the Optionee's Legal Representative. Except to the
extent permitted by the foregoing, the Option may not be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate,
encumber or otherwise dispose of the Option, the Option and all rights hereunder
shall immediately become null and void.

     3.2.  Investment Representation.  The Optionee hereby represents and
           -------------------------
covenants that (a) any share of Stock purchased upon exercise of the Option will
be purchased for investment and not with a view to the distribution thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
                                                                   ----------
Act"), unless such purchase has been registered under the Securities Act and any
---
applicable state securities laws; (b) any subsequent sale of any such shares
shall be made either pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws, or pursuant to an
exemption from registration under the Securities Act and such state securities
laws; and (c) if requested by the Company, the Optionee shall submit a written
statement, in form satisfactory to the Company, to the

                                      -3-
<PAGE>

effect that such representation (x) is true and correct as of the date of
purchase of any shares hereunder or (y) is true and correct as of the date of
any sale of any such shares, as applicable. As a further condition precedent to
any exercise of the Option, the Optionee shall comply with all regulations and
requirements of any regulatory authority having control of or supervision over
the issuance or delivery of the shares and, in connection therewith, shall
execute any documents which the Board or the Committee shall in its sole
discretion deem necessary or advisable.

     3.3.  Withholding Taxes.  (a)  As a condition precedent to the delivery of
           -----------------
Stock upon exercise of the Option, the Optionee shall, upon request by the
Company, pay to the Company in addition to the purchase price of the shares,
such amount of cash as the Company may be required, under all applicable
federal, state, local or other laws or regulations, to withhold and pay over as
income or other withholding taxes (the "Required Tax Payments") with respect to
                                        ---------------------
such exercise of the Option.  If the Optionee shall fail to advance the Required
Tax Payments after request by the Company, the Company may, in its discretion,
deduct any Required Tax Payments from any amount then or thereafter payable by
the Company to the Optionee.

     (b) The Optionee may elect to satisfy his or her obligation to advance the
Required Tax Payments by any of the following means: (1) a cash payment to the
Company pursuant to Section 3.3(a), (2) delivery to the Company of previously
owned whole shares of Stock (which the Optionee has held for at least six months
prior to the delivery of such shares or which the Optionee purchased on the open
market and for which the Optionee has good title, free and clear of all liens
and encumbrances) having a Fair Market Value, determined as of the date the
obligation to withhold or pay taxes first arises in connection with the Option
(the "Tax Date"), equal to the Required Tax Payments, (3) authorizing the
      --------
Company to withhold whole shares of Stock which would otherwise be delivered to
the Optionee upon exercise of the Option having a Fair Market Value, determined
as of the Tax Date, equal to the Required Tax Payments, (4) a cash payment by a
broker-dealer acceptable to the Company to whom the Optionee has submitted an
irrevocable notice of exercise or (5) any combination of (1), (2) and (3). The
Committee may disapprove an election pursuant to any of clauses (2)-(5) if the
Committee determines, based on the opinion of recognized securities counsel,
that the method so elected would result in liability to the Optionee under
Section 16(b) of the Exchange Act or the regulations promulgated thereunder.
Shares of Stock to be delivered or withheld may not have a Fair Market Value in
excess of the minimum amount of the Required Tax Payments. Any fraction of a
share of Stock which would be required to satisfy any such obligation shall be
disregarded and the remaining amount due shall be paid in cash by the Optionee.
No certificate representing a share of Stock shall be delivered until the
Required Tax Payments have been satisfied in full.

     3.4  Adjustment.  In the event of any stock split, stock dividend,
          ----------
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee
without an increase in the aggregate purchase price.  If any adjustment would
result in a fractional security being subject to the Option,

                                      -4-
<PAGE>

the Company shall pay the Optionee, in connection with the first exercise of the
Option, in whole or in part, occurring after such adjustment, an amount in cash
determined by multiplying (i) the fraction of such security (rounded to the
nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on
the exercise date over (B) the exercise price of the Option. The decision of the
Committee regarding any such adjustment shall be final, binding and conclusive.

     3.5.  Compliance with Applicable Law.  The Option is subject to the
           ------------------------------
condition that if the listing, registration or qualification of the shares
subject to the Option upon any securities exchange or under any law, or the
consent or approval of any governmental body, or the taking of any other action
is necessary or desirable as a condition of, or in connection with, the purchase
or delivery of shares hereunder, the Option may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval
shall have been effected or obtained, free of any conditions not acceptable to
the Company.  The Company agrees to use reasonable efforts to effect or obtain
any such listing, registration, qualification, consent or approval.

     3.6.  Delivery of Certificates.  Upon the exercise of the Option, in whole
           ------------------------
or in part, the Company shall deliver or cause to be delivered one or more
certificates representing the number of shares purchased against full payment
therefor. The Company shall pay all original issue or transfer taxes and all
fees and expenses incident to such delivery, except as otherwise provided in
Section 3.3.

     3.7.  Option Confers No Rights as Stockholder.  The Optionee shall not be
           ---------------------------------------
entitled to any privileges of ownership with respect to shares of Stock subject
to the Option unless and until purchased and delivered upon the exercise of the
Option, in whole or in part, and the Optionee becomes a stockholder of record
with respect to such delivered shares; and the Optionee shall not be considered
a stockholder of the Company with respect to any such shares not so purchased
and delivered.

     3.8.  Option Confers No Rights to Continued Employment.  In no event shall
           ------------------------------------------------
the granting of the Option or its acceptance by the Optionee give or be deemed
to give the Optionee any right to continued employment by the Company.

     3.9.  Decisions of Board or Committee.  The Board or the Committee shall
           -------------------------------
have the right to resolve all questions which may arise in connection with the
Option or its exercise. Any interpretation, determination or other action made
or taken by the Board or the Committee regarding the Plan or this Agreement
shall be final, binding and conclusive.

     3.10. Company to Reserve Shares.  The Company shall at all times prior to
           -------------------------
the expiration or termination of the Option reserve and keep available, either
in its treasury or out of its authorized but unissued shares of Stock, the full
number of shares subject to the Option from time to time.

                                      -5-
<PAGE>

     3.11. Agreement Subject to the Plan.  This Agreement is subject to the
           -----------------------------
provisions of the Plan and shall be interpreted in accordance therewith. The
Optionee hereby acknowledges receipt of a copy of the Plan.

     4.    Miscellaneous Provisions.
           ------------------------

     4.1.  Designation as Nonqualified Stock Option.  The Option is hereby
           ----------------------------------------
designated as not constituting an "incentive stock option" within meaning of
section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); this
Agreement shall be interpreted and treated consistently with such designation.

     4.2.  Meaning of Certain Terms.  As used herein, the term "Legal
           ------------------------                             -----
Representative" shall include an executor, administrator, legal representative,
--------------
guardian or similar person and the term "Permitted Transferee" shall include any
                                         --------------------
transferee (i) pursuant to a transfer permitted under Section 6.4 of the Plan
and Section 3.1 hereof or (ii) designated pursuant to beneficiary designation
procedures approved by the Company.

     4.3.  Successors.  This Agreement shall be binding upon and inure to the
           ----------
benefit of any successor or successors of the Company and any person or persons
who shall, upon the death of the Optionee, acquire any rights hereunder in
accordance with this Agreement or the Plan.

     4.4.  Notices.  All notices, requests or other communications provided for
           -------
in this Agreement shall be made, if to the Company, to Kayser Building, 100
North Stanton, El Paso, Texas 79901, Attention: Corporate Secretary, and if to
the Optionee, to 5712 Mira Grande, El Paso, TX 79912. All notices, requests or
other communications provided for in this Agreement shall be made in writing
either (a) by personal delivery to the party entitled thereto, (b) by facsimile
with confirmation of receipt, (c) by mailing in the United States mails to the
last known address of the party entitled thereto or (d) by express courier
service. The notice, request or other communication shall be deemed to be
received upon personal delivery, upon confirmation of receipt of facsimile
transmission or upon receipt by the party entitled thereto if by United States
mail or express courier service; provided, however, that if a notice, request or
other communication is not received during regular business hours, it shall be
deemed to be received on the next succeeding business day of the Company.

     4.5.  Governing Law.  This Agreement, the Option and all determinations
           -------------
made and actions taken pursuant hereto and thereto, to the extent not governed
by the laws of the United States, shall be governed by the laws of the State of
Texas and construed in accordance therewith without giving effect to principles
of conflicts of laws.

                                      -6-
<PAGE>

     4.6.  Counterparts.  This Agreement may be executed in two counterparts
           ------------
each of which shall be deemed an original and both of which together shall
constitute one and the same instrument.

                                             EL PASO ELECTRIC COMPANY

                                             By: /s/ KENNETH R. HEITZ
                                                --------------------------
                                             Name: Kenneth R. Heitz
                                             Title: Director

Accepted this 8th day of February, 2001.

 /s/ JAMES S. HAINES, JR.
-----------------------------
     James S. Haines, Jr.

                                      -7-<PAGE>

                                                                Exhibit 10.27-01

                                                                           FINAL
                                                                           -----
                                AMENDMENT NO. 1
                            TO EMPLOYMENT AGREEMENT

     This Amendment No. 1 dated as of December 15, 2000 to that certain
Employment Agreement dated as of April 30, 1996 (the "Agreement") by and between
El Paso Electric Company, a Texas corporation ("Company") and James S. Haines,
Jr. ("Executive").  Capitalized terms used and not otherwise defined herein
shall have the meanings given them in the Agreement.

                                  WITNESSETH:

     WHEREAS, the parities have heretofore entered into the Agreement;

     WHEREAS, the Company desires to extend the period of Executive's employment
and amend or supplement various terms of Executive's employment; and

     WHEREAS, Executive is willing to extend the period of his employment with
the Company and to accept the proposed amended and supplemented terms of such
employment.

     NOW, THEREFORE, the parties hereto agree as follows:

     1.   Agreement, Section 1.3.  The Employment Term is extended through April
          ----------------------
30, 2003.

     2.   Agreement, Section 1.4.  The section is amended by adding new second
          ----------------------
and third sentences as follows:

          "Notwithstanding the foregoing, this Agreement shall be automatically
terminated on the effective date of employment by the Company of a new chief
executive officer.  In the event of a termination pursuant to the immediately
preceding sentence, the provisions of Sections 5.1 and 5.7 of Article V shall
not be applicable, and Executive shall be entitled to be compensated for
accumulated sick leave and paid time off based upon annual base compensation of
$425,000."

     3.   Agreement, Section 2.3.  The section is amended by adding a new
          ----------------------
subsection (d) as follows:

               "(d)  Company hereby grants to Executive nontransferable options
to purchase 150,000 shares of Common Stock (the "Extension Options") for $12.60
per share, which is the closing price of the Common Stock on the American Stock
Exchange on the effective date of this Amendment. The Extension Options will be
evidenced by the Company's standard form of Stock Option Agreement, and the
maximum number of such options will be incentive stock options. The Stock Option
<PAGE>

Agreement will provide that the Extension Options shall expire if not previously
exercised on December 15, 2010, and shall vest as follows:

                            - 75,000 on May 1, 2002
                            - 75,000 on May 1, 2003

in each case, in the event that the Agreement shall not have been previously
terminated, and provided that all such Extension Options shall vest immediately
on the effective date of employment by the Company of a new chief executive
officer. The Stock Option Agreement shall contain standard provisions to reflect
the requirements of Section 6.8 of the Company's 1999 Long-Term Incentive Plan."

     4.   Agreement, Section 4.1/Exhibit 4.1. The Agreement is hereby amended by
          ----------------------------------
deleting the sixth item in Exhibit 4.1 and substituting the following:  "Annual
paid vacation of six (6) weeks per year, effective January 1, 2001."

     5.   Agreement, Article V.  Article V of the Agreement is hereby amended as
          --------------------
follows:

               (a)  Section 5.1 shall not be operative for any "Triggering
Event" that shall occur on or after April 30, 2001.

               (b)  The references in Sections 5.2 and 5.6 to "April 30, 2001"
shall be changed to "April 30, 2003".

               (c)  The phrase in the first sentence of Section 5.4(a) ", in
which event the Company shall pay Executive the amounts set forth in Section 5.1
above" shall be deleted in the event that the Executive's "Total Disability"
shall occur on or after April 30, 2001.

               (d)  Section 5.7 shall not be operative for any "Change of
Control" that shall occur on or after April 30, 2001.

     6.   Except as amended or supplemented by this Amendment No. 1, the
Agreement shall remain in full force and effect with no other modifications.
The Company's Board of Directors has approved this Amendment No. 1.

     7.   This Amendment No. 1 shall be effective as of December 15, 2000.

                                       2
<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 on the
date set forth below.

Date: February 8, 2001

                                    EL PASO ELECTRIC COMPANY

                                     /s/ GEORGE EDWARDS
                                    -------------------------------
                                    By: George Edwards
                                    Title: Chairman of the Board
                                           of Directors

                                    EXECUTIVE

                                     /s/ JAMES S. HAINES, JR.
                                    -------------------------------
                                    James S. Haines, Jr.

                                       3

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