El Paso Electric Announces Fourth Quarter and Annual 2018 Financial Results

EL PASO, Texas–(BUSINESS WIRE)–El Paso Electric Company (NYSE:EE):

Overview

Generally Accepted Accounting Principles (“GAAP”) Financial Measures

  • For the fourth quarter of 2018, El Paso Electric Company (“EE” or the
    “Company”) reported a net loss of $15.3 million, or $0.38 basic and
    diluted loss per share. In the fourth quarter of 2017, EE reported net
    income of $6.5 million, or $0.16 basic and diluted earnings per share.
  • For the twelve months ended December 31, 2018, EE reported net income
    of $84.3 million, or $2.07 basic and diluted earnings per share. Net
    income for the twelve months ended December 31, 2017, was $98.3
    million, or $2.42 basic and diluted earnings per share.

Non-GAAP Financial Measures

Non-GAAP Financial Measures exclude the impact of changes in fair value
of equity securities and realized gains (losses) from the sale of both
equity and fixed income securities. Refer to “Impact of New Accounting
Standards and Use of Non-GAAP Financial Measures” of this news release
for a reconciliation of Adjusted Net Income and Adjusted Basic Earnings
Per Share (non-GAAP financial measures) to Net Income (Loss) and Basic
Earnings (Loss) Per Share, the most directly comparable GAAP financial
measures, respectively.

  • For the fourth quarter of 2018, EE reported adjusted net income of
    $2.8 million, or $0.07 adjusted basic earnings per share. In the
    fourth quarter of 2017, EE reported adjusted net income of $5.3
    million, or $0.13 adjusted basic earnings per share.
  • For the twelve months ended December 31, 2018, EE reported adjusted
    net income of $94.7 million, or $2.33 adjusted basic earnings per
    share. Net income for the twelve months ended December 31, 2017, was
    $89.8 million, or $2.21 adjusted basic earnings per share.

“We had a solid fourth quarter of 2018 adjusted for the net losses in
our nuclear decommissioning trust funds due to the equity market
performance,” said Mary Kipp, President and Chief Executive Officer of
El Paso Electric Company. “We are pleased that our adjusted earnings
came in at the upper end of our 2018 Non-GAAP guidance range.”

Summary Results

The table and explanations below are presented on a GAAP basis and
indicate the major factors affecting fourth quarter and twelve months
ended December 31, 2018, net income (loss) relative to fourth quarter
and twelve months ended December 31, 2017, net income, respectively (in
thousands except Basic EPS data):

     
Quarter Ended Twelve Months Ended

Pre-Tax
Effect

 

After-
Tax
Effect

 

Basic
EPS

Pre-Tax
Effect

 

After-
Tax
Effect

 

Basic
EPS

December 31, 2017 $ 6,500 $ 0.16 $ 98,261 $ 2.42
Changes in:
Investment and interest income, NDT $ (23,956 ) (19,178 ) (0.47 ) $ (23,064 ) (18,419 ) (0.46 )
Retail non-fuel base revenues (8,958 ) (7,077 ) (0.18 ) (658 ) (520 ) (0.01 )
Depreciation and amortization (592 ) (469 ) (0.01 ) (5,539 ) (4,377 ) (0.11 )
Effective tax rate, other (378 ) (0.01 ) 16,643 0.41
Palo Verde O&M expenses 2,359 1,864 0.05 2,910 2,299 0.06
O&M expenses at fossil-fuel generating plants 1,053 833 0.02 (3,188 ) (2,518 ) (0.06 )
Palo Verde performance rewards, net (5,005 ) (3,954 ) (0.10 )
Other 2,620   0.06   (3,100 ) (0.08 )
December 31, 2018 $ (15,285 ) $ (0.38 ) $ 84,315   $ 2.07  
 

Fourth Quarter 2018

Net income (loss) for the quarter ended December 31, 2018, when compared
to the quarter ended December 31, 2017, was negatively affected by
(presented on a pre-tax basis):

  • Decreased investment and interest income primarily due to net realized
    and unrealized losses of $22.6 million for the three months ended
    December 31, 2018, compared to net gains of $1.5 million for the three
    months ended December 31, 2017, on securities held in the Company’s
    Palo Verde nuclear decommissioning trust funds (“NDT”). Beginning on
    January 1, 2018, the Company adopted ASU 2016-01, Financial
    Instruments, and began recording unrealized gains and losses on equity
    securities held in the NDT directly in earnings. During the three
    months ended December 31, 2018, the U.S. equity markets experienced
    the greatest overall fourth quarter declines since 2008. Refer to
    “Impact of New Accounting Standards and Use of Non-GAAP Financial
    Measures” for further details.
  • Decreased retail non-fuel base revenues primarily due to rate changes
    that include the refunds of approximately $5.6 million for the
    reduction in the federal corporate income tax rate due to the federal
    legislation commonly referred to as the Tax Cuts and Jobs Act of 2017
    (the “TCJA”) and $4.8 million of relate back revenues in Texas, from
    July 18, 2017 to September 30, 2017. The relate back revenues were
    recorded in November 2017 when they were approved by the Public
    Utility Commission of Texas (the “PUCT”) in its final order in the
    Company’s 2017 Texas retail rate case in Docket No. 46831 (the “2017
    PUCT Final Order”). Excluding the impact of rate changes, retail
    non-fuel base revenues increased by $1.4 million primarily due to
    increased revenues from residential customers of $2.0 million caused
    by a 3.5% increase in kWh sales that resulted from a 1.7% increase in
    the average number of residential customers served compared to the
    three months ended December 31, 2017, partially offset by decreased
    revenues from small commercial and industrial customers of $0.6
    million caused by a 2.5% decrease in kWh sales. Refer to “Regulatory
    Matters” of this news release for further details. Non-fuel base
    revenues and kilowatt-hour (“kWh”) sales for the three months ended
    December 31, 2018, are provided by customer class on the Sales and
    Revenues Statistics of this news release.
  • Increased depreciation and amortization primarily due to increased
    plant balances.

Net income (loss) for the quarter ended December 31, 2018, when compared
to the quarter ended December 31, 2017, was positively affected by
(presented on a pre-tax basis):

  • Decreased Palo Verde Generating Station (“Palo Verde”) operations and
    maintenance (“O&M”) expenses primarily due to lower incentives and
    administrative and general (“A&G”) benefits in the three months ended
    December 31, 2018, when compared to the three months ended December
    31, 2017.
  • Decreased O&M expenses related to the Company’s fossil-fuel generating
    plants primarily due to decreased maintenance and outage costs at
    Newman Power Station (“Newman”) during the three months ended December
    31, 2018, when compared to the three months ended December 31, 2017.

Full Year 2018

Net income for the twelve months ended December 31, 2018, when compared
to the twelve months ended December 31, 2017, was negatively affected by
(presented on a pre-tax basis):

  • Decreased investment and interest income, NDT primarily due to net
    realized and unrealized losses on securities held in the NDT.
    Beginning on January 1, 2018, the Company adopted ASU 2016-01,
    Financial Instruments, and began recording unrealized gains and losses
    on equity securities held in the NDT directly in earnings. Refer to
    “Impact of New Accounting Standards and Use of Non-GAAP Financial
    Measures” for further details.
  • Increased depreciation and amortization primarily due to increased
    plant balances.
  • Palo Verde performance rewards of $5.0 million, associated with the
    2013 to 2015 performance periods, net of disallowed fuel and purchased
    power costs related to the resolution of the Texas fuel reconciliation
    proceeding designated as PUCT Docket No. 46308 for the period from
    April 2013 through March 2016, were recorded in June 2017, with no
    comparable amount recorded in the twelve months ended December 31,
    2018.
  • Increased O&M expenses related to the Company’s fossil-fuel generating
    plants primarily due to outage costs at Rio Grande Power Station Unit
    8 in 2018. Maintenance expense and outage costs at Newman during the
    twelve months ended December 31, 2018 were comparable to the twelve
    months ended December 31, 2017.
  • Decreased retail non-fuel base revenues primarily due to refunds of
    approximately $28.2 million for the reduction in the federal corporate
    income tax rate due to the TCJA, partially offset by a $7.7 million
    base rate increase compared to the twelve months ended December 31,
    2017 base rate increase related to the 2017 PUCT Final Order.
    Excluding the impact of rate changes, retail non-fuel base revenues in
    the twelve months ended December 31, 2018, increased by $19.8 million
    primarily due to (i) increased revenues from residential customers of
    $17.1 million caused by a 5.9% increase in kWh sales that resulted
    from favorable weather and a 1.7% increase in the average number of
    residential customers served compared to the twelve months ended
    December 31, 2017, and (ii) increased revenues in the twelve months
    ended December 31, 2018, from small commercial and industrial
    customers of $2.9 million that resulted from favorable weather and a
    0.9% increase in the average number of small commercial and industrial
    customers served compared to the twelve months ended December 31,
    2017. Cooling degree days increased 8.8% in the twelve months ended
    December 31, 2018, when compared to the twelve months ended December
    31, 2017. Cooling degree days in the twelve months ended December 31,
    2018 were 10.9% above the 10-year average. Heating degree days
    increased 27.3% in the twelve months ended December 31, 2018, when
    compared to the twelve months ended December 31, 2017. Heating degree
    days in the twelve months ended December 31, 2018 were 5.8% below the
    10-year average. Refer to “Regulatory Matters” of this news release
    for further details. Non-fuel base revenues and kWh sales for the
    twelve months ended December 31, 2018 are provided by customer class
    on the Sales and Revenues Statistics of this news release.

Net income for the twelve months ended December 31, 2018, when compared
to the twelve months ended December 31, 2017, was positively affected by
(presented on a pre-tax basis):

  • Decreased effective tax rate, other primarily due to the TCJA that
    reduced the federal corporate income tax rate from 35% to 21%,
    excluding the tax impact of other items in the table above partially
    offset by a reduction in state tax reserves in 2017 due to the
    favorable settlement of Texas state income tax audits.
  • Decreased Palo Verde O&M expenses primarily due to lower incentives
    and A&G benefits for the twelve months ended December 31, 2018, when
    compared to the twelve months ended December 2017.

Regulatory Matters

Texas Regulatory Matters

On December 18, 2017, the PUCT issued the 2017 PUCT Final Order for the
Company’s rate case in Docket No. 46831. New base rates, including
additional surcharges associated with rate case expenses and the relate
back of rates to consumption on and after July 18, 2017 through December
31, 2017, were implemented in January 2018.

Following the enactment of the TCJA on December 22, 2017, and in
compliance with the 2017 PUCT Final Order, on March 1, 2018, the Company
filed with the PUCT and each of its municipalities a proposed refund
tariff designed to reduce base charges for Texas customers equivalent to
the expected annual decrease of $22.7 million in federal income tax
expense resulting from the TCJA changes, and an additional refund of
$4.3 million for the amortization of a regulatory liability related to
the reduced tax expense for the months of January through March of 2018.
This filing was assigned PUCT Docket No. 48124. The refund is reflected
in rates over a period of one year beginning April 1, 2018, and will be
updated annually until new base rates are implemented pursuant to the
Company’s next Texas rate case filing. The PUCT issued an order on
December 10, 2018, approving the proposed refund tariff.

Transmission Cost Recovery Factor. On January 25, 2019, the
Company filed an application with the PUCT to establish its Transmission
Cost Recovery Factor (“TCRF”), which was assigned PUCT Docket No. 49148
(“2019 TCRF rate filing”). The 2019 TCRF rate filing is designed to
recover a requested $8.2 million of Texas jurisdictional transmission
revenue requirement that is not currently being recovered in the
Company’s Texas base rates for transmission-related investments placed
in service from October 1, 2016, through September 30, 2018, net of
retirements.

New Mexico Regulatory Matters

The Company is required to file its next New Mexico rate case no later
than July 31, 2019. On January 24, 2018, the New Mexico Public
Regulation Commission (the “NMPRC”) initiated a proceeding in Case No.
18-00016-UT on the impact of the TCJA on New Mexico regulated utilities.
On April 4, 2018, the NMPRC issued an order requiring the Company to
file a proposed interim rate rider to adjust the Company’s New Mexico
base revenues in amounts equivalent to the Company’s reduced income tax
expense for New Mexico customers resulting from the TCJA, to be
implemented on or before May 1, 2018. On April 16, 2018, after
consultation with the New Mexico Attorney General pursuant to the NMPRC
order, the Company filed an interim rate rider with the NMPRC with a
proposed effective date of May 1, 2018. The annualized credits expected
to be refunded to New Mexico customers approximate $4.9 million. The
Company implemented the interim rate rider in customer bills beginning
May 1, 2018, pursuant to the NMPRC order.

Impact of New Accounting Standards and Use of Non-GAAP Financial
Measures

Effective January 1, 2018, the Company adopted:

(i) ASU 2014-09, Revenue from Contracts with Customers, using the
modified retrospective approach, which had no cumulative effect
adjustment to retained earnings. Following the adoption of the standard,
revenues of $8.9 million related to reimbursed costs of energy
efficiency programs approved by the Company’s regulators are reported in
operating revenues from customers for the twelve months ended December
31, 2018. Related expenses of an equal amount are reported in operations
and maintenance expenses.

(ii) ASU 2017-07, Compensation – Retirement Benefits, retrospectively
for the income statement presentation of the service cost component as
part of operating income and the other components of net benefit costs
outside of any subtotal of operating income for each period presented.
The Company reclassified $8.2 million to “Operations and maintenance” in
the Company’s Statement of Operations for the twelve months ended
December 31, 2017 by increasing (i) “Investment and interest income,
net” by $21.1 million, (ii) “Miscellaneous non-operating income” by
$11.3 million, (iii) “Miscellaneous non-operating deductions” by $8.4
million, and (iv) “Other interest” by $15.8 million. As a result of the
reclassifications, “Operations and maintenance” increased to $10.8
million in service cost from the $2.6 million in net periodic benefit
cost previously reported.

(iii) ASU 2016-01, Financial Instruments – Recognition and Measurement
of Financial Assets and Financial Liabilities. Upon adoption of this new
standard, the Company recorded, as of January 1, 2018, a cumulative
effect adjustment to retained earnings of $41.0 million, net of tax, for
the unrealized gains (losses) related to equity securities held in the
NDT. As required by ASU 2016-01, changes in the fair value of equity
securities are recognized in the Company’s Statements of Operations. The
adoption of the new standard added the potential for significant
volatility to the Company’s reported results of operations as changes in
the fair value of equity securities may occur. Furthermore, the equity
investments included in the NDT are significant and are expected to
increase significantly during the remaining life (estimated to be 27 to
30 years) of Palo Verde. Accordingly, the Company has provided the
following non-GAAP financial measures, which reconcile GAAP net income
(loss) to non-GAAP adjusted net income and GAAP basic earnings (loss)
per share to non-GAAP adjusted basic earnings per share, to exclude the
impact of changes in fair value of equity securities and realized gains
(losses) from the sale of both equity and fixed income securities.

 
Three Months Ended
December 31,
2018   2017
(In thousands except for per share data)
Net income (loss) (GAAP) $ (15,285 ) $ 6,500
Adjusting items before income tax effects
Unrealized losses, net 22,331
Realized (gains) losses, net 319   (1,504 )
Total adjustments before income tax effects 22,650 (1,504 )
Income taxes on above adjustments (4,530 ) 301  
Adjusting items, net of income taxes 18,120   (1,203 )
Adjusted net income (non-GAAP) $ 2,835   $ 5,297  
 
Basic earnings (loss) per share (GAAP) $ (0.38 ) $ 0.16  
Adjusted basic earnings per share (non-GAAP) $ 0.07   $ 0.13  
  Twelve Months Ended
December 31,
2018   2017
(In thousands except for per share data)
Net income (GAAP) $ 84,315 $ 98,261
Adjusting items before income tax effects
Unrealized losses, net 18,601
Realized gains, net (5,634 ) (10,626 )
Total adjustments before income tax effects 12,967 (10,626 )
Income taxes on above adjustments (2,593 ) 2,125  
Adjusting items, net of income taxes 10,374   (8,501 )
Adjusted net income (non-GAAP) $ 94,689   $ 89,760  
 
Basic earnings per share (GAAP) $ 2.07   $ 2.42  
Adjusted basic earnings per share (non-GAAP) $ 2.33   $ 2.21  
 

Adjusted net income and adjusted basic earnings per share are not
measures of financial performance under GAAP and should not be
considered as an alternative to net income (loss) and earnings (loss)
per share, respectively. Furthermore, the Company’s presentation of any
non-GAAP financial measure may not be comparable to similarly titled
measures used by other companies. The Company believes adjusted net
income and adjusted basic earnings per share are useful financial
measures for investors and analysts in understanding the Company’s core
operating performance because each measure removes the effects of
variances reported in the Company’s results of operations that are not
indicative of fundamental changes in the earnings capacity of the
Company.

Capital and Liquidity

As of December 31, 2018, our capital structure, including common stock
equity, long-term debt, current maturities of long-term debt and
short-term borrowings under the Revolving Credit Facility (the “RCF”)
consisted of 44.8% common stock equity and 55.2% debt. At December 31,
2018, we had a balance of $12.9 million in cash and cash equivalents.
Based on current projections, we believe that we will have adequate
liquidity through our current cash balances, cash from operations,
available borrowings under the RCF and debt or equity issuances in the
capital markets to meet all of our anticipated cash requirements over
the next twelve months.

Cash flows from operations for the twelve months ended December 31,
2018, were $285.4 million, compared to $288.6 million for the twelve
months ended December 31, 2017. A component of cash flows from
operations is the change in net over-collection and under-collection of
fuel revenues. The difference between fuel revenues collected and fuel
expense incurred is deferred to be either refunded (over-recoveries) or
surcharged (under-recoveries) to customers in the future. During the
twelve months ended December 31, 2018, we had fuel over-recoveries of
$4.8 million compared to over-recoveries of fuel costs of $17.1 million
during the twelve months ended December 31, 2017. At December 31, 2018,
we had a net fuel over-recovery balance of $11.0 million, including
over-recoveries of $8.9 million in Texas, $2.0 million in New Mexico and
$0.1 million in FERC jurisdictions. On October 15, 2018, we filed a
request with the PUCT to decrease our Texas fixed fuel factor by
approximately 6.99% to reflect decreased fuel expenses primarily related
to a decrease in the price of natural gas used to generate power. On
October 25, 2018, the Company’s fixed fuel factor was approved on an
interim basis effective for the first billing cycle of the November 2018
billing month. The revised factor was approved by the PUCT and the
docket closed on November 19, 2018. The Texas fixed fuel factor will
continue thereafter until changed by the PUCT.

During the twelve months ended December 31, 2018, our primary capital
requirements were for the construction and purchase of electric utility
plant, payment of common stock dividends and purchases of nuclear fuel.
Capital expenditures for new electric utility plant were $240.0 million
in the twelve months ended December 31, 2018, compared to $199.9 million
in the twelve months ended December 31, 2017. Capital expenditures for
2019 are expected to be approximately $249 million. Capital requirements
for purchases of nuclear fuel were $38.4 million in the twelve months
ended December 31, 2018, compared to $38.5 million in the twelve months
ended December 31, 2017.

On January 31, 2019, the Board of Directors declared a quarterly cash
dividend of $0.36 per share payable on March 29, 2019 to shareholders of
record as of the close of business on March 15, 2019. On December 28,
2018, we paid a quarterly cash dividend of $0.36 per share, or $14.6
million, to shareholders of record as of the close of business on
December 14, 2018. We paid a total of $57.5 million in cash dividends
during the twelve months ended December 31, 2018. We expect to continue
paying quarterly cash dividends in 2019.

Our cash requirements for federal and state income taxes vary from year
to year based on taxable income, which is influenced by the timing of
revenues and expenses recognized for income tax purposes. The following
summary describes the major impacts of the TCJA on our liquidity.

The TCJA discontinued bonus depreciation for regulated utilities, which
reduced tax deductions previously available to us for 2018 and 2019. The
decrease in tax deductions results in the utilization of our net
operating loss carryforwards (“NOL carryforwards”) and other
carryforwards approximately one year earlier than previously anticipated
and is expected to result in higher income tax payments beginning in
2020, after the full utilization of NOL and other carryforwards.
However, due to the lower federal corporate income tax rate enacted by
the TCJA, our future federal corporate income tax payments will be made
at the reduced rate of 21% beginning in 2018. Due to NOL and other
carryforwards, minimal tax payments are expected for 2019, which are
mostly related to state income taxes.

The effect of the TCJA on our rates is beneficial to our customers.
Following the enactment of the TCJA and the reduction of the federal
corporate income tax rate, revenues collected from our customers in 2018
were reduced by $28.2 million, which negatively impacted our cash flows
and a comparable amount is expected during 2019.

We received approval from the NMPRC on October 7, 2015, to guarantee the
issuance of up to $65.0 million of long-term debt by the Rio Grande
Resources Trust (the “RGRT”) to finance future purchases of nuclear fuel
and to refinance existing nuclear fuel debt obligations. We received
additional approval from the NMPRC on October 4, 2017, to amend and
extend the RCF, issue up to $350.0 million in long-term debt and to
redeem and refinance the $63.5 million 2009 Series A 7.25% Pollution
Control Bonds and the $37.1 million 2009 Series B 7.25% Pollution
Control Bonds, which are subject to optional redemption in 2019. The
NMPRC approval to issue up to $350.0 million in long-term debt
supersedes its prior approval. We received approval from the FERC on
October 31, 2017, to issue up to $350.0 million in long-term debt, to
guarantee the issuance of up to $65.0 million of long-term debt by the
RGRT, and to continue to utilize our existing RCF with the ability to
amend and extend the RCF at a future date, and to redeem, refinance
and/or replace the 2009 Series A and Series B Pollution Control Bonds
with debt of equal face value.

Contacts

Media Contacts
Eddie Gutierrez
915.543.5763
eduardo.gutierrez@epelectric.com

Investor Relations
Lisa Budtke
915.543.5947
lisa.budtke@epelectric.com

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