El Paso Electric Announces First Quarter 2019 Financial Results

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

Overview

  • For the first quarter of 2019, El Paso Electric Company (“EE” or the
    “Company”) reported net income of $6.1 million, or $0.15 basic and
    diluted earnings per share. In the first quarter of 2018, EE reported
    a net loss of $7.0 million, or $0.17 basic and diluted loss per share.
  • For the first quarter of 2019, EE reported an adjusted net loss of
    $6.7 million, or $0.17 adjusted basic loss per share. In the first
    quarter of 2018, EE reported an adjusted net loss of $5.0 million, or
    $0.12 adjusted basic loss per share. Adjusted net loss and adjusted
    basic loss per share, both 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 “Use of Non-GAAP Financial Measures”
    of this news release for a reconciliation of Adjusted Net Loss and
    Adjusted Basic Loss Per Share (non-GAAP financial measures) to Net
    Income (Loss) and Basic Earnings (Loss) Per Share, the most directly
    comparable GAAP financial measures, respectively.

“As anticipated, regulatory lag and the seasonality of our business
resulted in an adjusted net loss for the quarter,” said Mary Kipp,
President and Chief Executive Officer of El Paso Electric Company.
“However, to mitigate the impact of regulatory lag on our financial
results, we successfully filed to establish the Company’s first
transmission and distribution cost recovery factors in Texas during the
first quarter 2019.”

Summary Results

The table and explanations below are presented on a GAAP basis and
indicate the major factors affecting the net income during the three
months ended March 31, 2019, relative to the net loss during the three
months ended March 31, 2018 (in thousands except Basic EPS data):

        Three Months Ended

Pre-Tax
Effect

   

After-
Tax
Effect

   

Basic
EPS

March 31, 2018 $ (6,966 ) $ (0.17 )
Changes in:
Investment and interest income, NDT $ 18,608 14,839 0.36
Retail non-fuel base revenues 1,116 882 0.02
Income tax expense-other (1,327 ) (0.03 )
Depreciation and amortization (1,312 ) (1,036 ) (0.03 )
Interest charges (credits) (1,188 ) (939 ) (0.02 )
Other 636   0.02  
March 31, 2019 $ 6,089   $ 0.15  
 

First Quarter 2019

Net income (loss) for the three months ended March 31, 2019, when
compared to the three months ended March 31, 2018, was positively
affected by (presented on a pre-tax basis):

  • Increased investment and interest income primarily due to net realized
    and unrealized gains of $16.0 million for the three months ended March
    31, 2019, compared to net losses of $2.5 million for the three months
    ended March 31, 2018, on securities held in the Company’s Palo Verde
    nuclear decommissioning trust funds (“NDT”). Refer to “Use of Non-GAAP
    Financial Measures” for further details.
  • Increased retail non-fuel base revenues primarily due to increased
    revenues from residential customers of $1.2 million caused by a 2.6%
    increase in kilowatt-hour (“kWh”) sales that resulted from a 1.6%
    increase in the average number of residential customers served and
    favorable weather compared to the three months ended March 31, 2018.
    Heating degree days increased 17.5% in the three months ended March
    31, 2019, when compared to the three months ended March 31, 2018.
    Refer to “Regulatory Matters” of this news release for further
    details. Non-fuel base revenues and kWh sales for the three months
    ended March 31, 2019, are provided by customer class under the Sales
    and Statistics table of this news release.

Net income (loss) for the three months ended March 31, 2019, when
compared to the three months ended March 31, 2018, was negatively
affected by (presented on a pre-tax basis):

  • Increased income tax expense-other primarily due to differences in the
    annual effective tax rate and lower values of stock incentives vested
    in the three months ended March 31, 2019, compared to the three months
    ended March 31, 2018.
  • Increased depreciation and amortization primarily due to increased
    plant balances.
  • Increased interest charges (credits) primarily due to interest expense
    on the $125.0 million aggregate principal amount of 4.22% Senior Notes
    issued in June 2018 and an increase in the interest cost component of
    net periodic benefit cost of the Company’s employee benefit plans.
    These increases were partially offset by the purchase in lieu of
    redemption of $63.5 million principal amount of 2009 Series A 7.25%
    Pollution Control Bonds (“PCBs”) on February 1, 2019.

Regulatory Matters

Texas Regulatory Matters

Following the enactment of the federal legislation commonly referred to
as the Tax Cuts and Jobs Act of 2017 (the “TCJA”) on December 22, 2017,
and in compliance with the final order in the Company’s Texas retail
rate case in Docket No. 46831 (the “2017 PUCT Final Order”), on March 1,
2018, the Company filed with the Public Utility Commission of Texas (the
“PUCT”) and each of its Texas 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 was 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. On February 22,
2019, the Company filed with the PUCT and each of its Texas
municipalities an application to modify the tax refund tariff to remove
the portion of the base rate credit associated with the $4.3 million of
regulatory liability amortization, which expired March 31, 2019. The
filing was assigned PUCT Docket No. 49251.

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
(the “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. On April 30, 2019, the Company revised the request to $8.1
million to reflect a reclassified item that would likely be included in
a future Distribution Cost Recovery Factor filing. The Company cannot
predict the outcome of this filing at this time.

Distribution Cost Recovery Factor. On March 28, 2019, the Company
filed an application with the PUCT and each of its Texas municipalities
to establish its Distribution Cost Recovery Factor (“DCRF”), which was
assigned PUCT Docket No. 49395 (the “2019 DCRF rate filing”). The 2019
DCRF rate filing is designed to recover a requested $7.9 million of
Texas jurisdictional distribution revenue requirement that is not
currently being recovered in the Company’s Texas base rates for
distribution-related investments placed in service from October 1, 2016,
through December 31, 2018, net of retirements. The Company cannot
predict the outcome of this filing at this time.

New Mexico Regulatory Matters

The Company is required to file its next New Mexico rate case no later
than July 31, 2019. The Company expects to file its New Mexico rate case
using a December 31, 2018, historical test year period on July 31, 2019.

Use of Non-GAAP Financial Measures

As required by ASU 2016-01, Financial Instruments – Recognition and
Measurement of Financial Assets and Financial Liabilities, changes in
the fair value of equity securities are recognized in the Company’s
Statements of Operations. This 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 the Palo Verde Generating Station
(“Palo Verde”). Accordingly, the Company has provided the following
non-GAAP financial measures 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. Reconciliations of both
non-GAAP financial measures to the most directly comparable financial
information presented in accordance with GAAP are presented in the table
below. Non-GAAP adjusted net loss is reconciled to GAAP net income
(loss), and non-GAAP adjusted basic loss per share is reconciled to GAAP
basic earnings (loss) per share.

      Three Months Ended
March 31,
2019     2018
(In thousands except for per share data)
Net income (loss) (GAAP) $ 6,089 $ (6,966 )
Adjusting items before income tax effects
Unrealized (gains) losses, net (16,690 ) 3,781
Realized (gains) losses, net 701   (1,272 )
Total adjustments before income tax effects (15,989 ) 2,509
Income taxes on above adjustments 3,198   (502 )
Adjusting items, net of income taxes (12,791 ) 2,007  
Adjusted net loss (non-GAAP) $ (6,702 ) $ (4,959 )
 
Basic earnings (loss) per share (GAAP) $ 0.15   $ (0.17 )
Adjusted basic loss per share (non-GAAP) $ (0.17 ) $ (0.12 )
 

Adjusted net loss and adjusted basic loss 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 loss and
adjusted basic loss 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. Non-GAAP
financial information should be read together with, and is not an
alternative or substitute for, the Company’s financial results reported
in accordance with GAAP.

Capital and Liquidity

As of March 31, 2019, 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 43.1% common stock equity and 56.9% debt. At March 31,
2019, we had a balance of $8.5 million in cash and cash equivalents and
$38.4 million in restricted cash to purchase in lieu of redemption all
of the 2009 Series B 7.25% PCBs. 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 three months ended March 31, 2019,
were $26.4 million, compared to $26.2 million for the three months ended
March 31, 2018. 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 three months
ended March 31, 2019, we had fuel over-recoveries of $12.8 million
compared to over-recoveries of fuel costs of $8.0 million during the
three months ended March 31, 2018. At March 31, 2019, we had a net fuel
over-recovery balance of $23.8 million, including over-recoveries of
$19.3 million in our Texas, $4.4 million in our New Mexico and $0.1
million in our 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. On April 29, 2019, the
Company filed a petition with the PUCT, which was assigned PUCT Docket
No. 49482, requesting authority to implement, beginning on June 1, 2019,
a four-month, interim fuel refund of $19.4 million in fuel cost
over-recoveries, including interest, for the period from April 2016
through March 2019. The Company cannot predict the outcome of this
filing at this time.

During the three months ended March 31, 2019, our primary capital
requirements were related to 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
$52.4 million in the three months ended March 31, 2019, compared to
$66.9 million in the three months ended March 31, 2018. Capital
expenditures for 2019 are expected to be approximately $249 million.
Capital requirements for purchases of nuclear fuel were $9.5 million in
the three months ended March 31, 2019, compared to $9.3 million in the
three months ended March 31, 2018.

On March 29, 2019, we paid a quarterly cash dividend of $0.36 per share,
or $14.7 million, to shareholders of record as of the close of business
on March 15, 2019. We expect to continue paying quarterly cash dividends
in 2019. We expect our board of directors to conduct its annual review
of our dividend policy in the second quarter of 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 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%. Due to NOL 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.
A comparable amount is expected during 2019.

We received approval from the New Mexico Public Regulation Commission
(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% PCBs and the $37.1 million 2009 Series
B 7.25% PCBs, 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 7.25% PCBs and 2009 Series B 7.25% PCBs
with debt of equal face value. The authorization approved by the FERC is
effective from November 15, 2017 through November 14, 2019, and
supersedes its prior approvals.

Under these authorizations, on June 28, 2018, the Company issued $125.0
million in aggregate principal amount of 4.22% Senior Notes due August
15, 2028, and guaranteed the issuance by the RGRT of $65.0 million in
aggregate principal amount of 4.07% Senior Guaranteed Notes due August
15, 2025. The net proceeds from the sale of these senior notes were used
to repay outstanding short-term borrowings under the RCF, which included
borrowings made for working capital, general corporate purposes and the
purchase of nuclear fuel. Also, under these authorizations, on September
13, 2018, the Company and RGRT entered into a third amended and restated
credit agreement where we have available a $350.0 million RCF with a
term ending on September 13, 2023. We may increase the RCF by up to
$50.0 million (to a total of $400.0 million) during the term of the RCF,
upon the satisfaction of certain conditions more fully set forth in the
agreement, including obtaining commitments from lenders or third party
financial institutions. In addition, we may extend the maturity date of
the RCF up to two times, in each case for an additional one-year period
upon the satisfaction of certain conditions. Additionally, the Company
is preparing for potential transactions related to the 2009 Series A
7.25% PCBs and 2009 Series B 7.25% PCBs. On February 1, 2019, the
Company purchased in lieu of redemption all of the 2009 Series A 7.25%
PCBs utilizing funds borrowed under the RCF. On April 1, 2019, the
Company purchased in lieu of redemption all of the 2009 Series B 7.25%
PCBs utilizing funds borrowed under the RCF. The Company is currently
holding the bonds and may remarket them or replace them with debt
instruments of equivalent value at a future date depending on the
Company’s financing needs and market conditions, and in accordance with
FERC approval in April 2019 in response to the Company’s most recent
FERC application (see below).

On March 27, 2019, NMPRC issued a final order approving the Company’s
request to issue shares of common stock, including the reissuance of
treasury shares, in an amount up to $200.0 million in one or more
transactions. On April 18, 2019, the Company received approval from the
FERC to issue shares of common stock, including the reissuance of
treasury shares, in an amount up to $200.0 million in one or more
transactions; to utilize the existing RCF for short-term borrowing not
to exceed $400.0 million at any one time; to issue up to $225.0 million
in new long-term debt; and to remarket the $63.5 million Series A 7.25%
PCBs and the $37.1 million Series B 7.25% PCBs in the form of
replacement bonds or senior notes of equivalent value, not to exceed
$100.6 million. The authorization approved by the FERC is effective from
April 18, 2019 through April 18, 2021, and supersedes its prior
approvals.

We maintain the RCF for working capital and general corporate purposes
and financing of nuclear fuel through the RGRT. The RGRT, the trust
through which we finance our portion of nuclear fuel for Palo Verde, is
consolidated in our financial statements. The total amount borrowed for
nuclear fuel by the RGRT, excluding debt issuance costs, was $140.0
million at March 31, 2019, of which $30.0 million had been borrowed
under the RCF, and $110.0 million was borrowed through the issuance of
senior notes. Borrowings by the RGRT for nuclear fuel, excluding debt
issuance costs, were $134.1 million as of March 31, 2018, of which $89.1
million had been borrowed under the RCF and $45.0 million was borrowed
through the issuance of senior notes. Interest costs on borrowings to
finance nuclear fuel are accumulated by the RGRT and charged to us as
fuel is consumed and recovered through fuel recovery charges. At March
31, 2019, $173.0 million was outstanding under the RCF for working
capital and general corporate purposes. At March 31, 2018, $144.0
million was outstanding under the RCF for working capital and general
corporate purposes. Total aggregate borrowings under the RCF at March
31, 2019, were $203.0 million with an additional $146.9 million
available to borrow.

2019 Earnings Guidance

We are adjusting our GAAP earnings guidance for 2019 with a range of
$2.25 to $2.95 per basic share from $2.25 to $2.80 per share. The
guidance assumes normal operations and considers significant variables
that may impact earnings, such as weather, expenses, capital
expenditures, nuclear decommissioning trust gains/losses, and the
recovery of transmission and distribution investment costs in Texas. The
mid-point of the guidance range assumes 10-year average weather (cooling
and heating degree days) for the remainder of the year. The GAAP
guidance range includes $6.1 million or $0.15 per share to $20.4 million
or $0.50 per share, after-tax, of unrealized gains (losses) on equity
securities and realized gains (losses) from the sale of both equity and
fixed income securities from the Palo Verde decommissioning trust funds
based on historic returns on equity securities. After removing the
unrealized and realized gains (losses) of $0.15 to $0.50 per share our
non-GAAP earnings guidance range is $2.10 to $2.45 per basic share.

Conference Call

A conference call to discuss first quarter 2019 financial results is
scheduled for 11:30 A.M. Eastern Time, on May 8, 2019. The dial-in
number is 800-682-0995 with a conference ID number of 9724545. The
conference leader will be Lisa Budtke, Director-Treasury Services and
Investor Relations. A replay will run through May 22, 2019 with a
dial-in number of 888-203-1112 and a conference ID number of 9724545.
The conference call and presentation slides will be webcast live on the
Company’s website found at http://www.epelectric.com.
A replay of the webcast will be available shortly after the call.

Safe Harbor

This news release includes statements that are forward-looking
statements made pursuant to the safe harbor provisions of the Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements
regarding 2019 earnings guidance (including the anticipated impact of
ASU 2016-01); statements regarding the impact of the TCJA; statements
regarding current regulatory filings and anticipated regulatory filings;
statements regarding expected capital expenditures; statements regarding
expected dividends; and statements regarding the adequacy of our
liquidity to meet cash requirements. This information may involve risks
and uncertainties that could cause actual results to differ materially
from such forward-looking statements. Additional information concerning
factors that could cause actual results to differ materially from those
expressed in forward-looking statements is contained in EE’s most
recently filed periodic reports and in other filings made by EE with the
U.

Contacts

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

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

Read full story here

error: Content is protected !!