NOTES TO FINANCIAL STATEMENTS
(Unaudited)
A. Principles of Preparation
These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Annual Report of El Paso Electric Company on Form 10-K for the fiscal year ended
December 31, 2015
(the "
2015
Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the
2015
Form 10-K. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at
September 30, 2016
and
December 31, 2015
; the results of its operations and comprehensive operations for the
three, nine and twelve months ended
September 30, 2016
and
2015
; and its cash flows for the
nine months ended
September 30, 2016
and
2015
. The results of operations and comprehensive operations for the
three and nine
months ended
September 30, 2016
and the cash flows for the
nine months ended
September 30, 2016
are not necessarily indicative of the results to be expected for the full calendar year.
Pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles.
Use of Estimates
. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates on an on-going basis, including those related to depreciation, unbilled revenue, income taxes, fuel costs, pension and other post-retirement obligations and asset retirement obligations ("ARO"). Actual results could differ from those estimates.
Revenues
. Revenues related to the sale of electricity are generally recorded when service is provided or electricity is delivered to customers. The billing of electricity sales to retail customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. Unbilled revenues are recorded for estimated amounts of energy delivered in the period following the customer's billing cycle to the end of the month. Unbilled revenues are estimated based on monthly generation volumes and by applying an average revenue/kWh to the number of estimated kWhs delivered but not billed. Accounts receivable included accrued unbilled revenues of
$30.3 million
at
September 30, 2016
and
$21.7 million
at
December 31, 2015
. The Company presents revenues net of sales taxes in its statements of operations.
Depreciation.
The Company routinely evaluates the depreciable service lives, cost of removal and salvage values of its property, plant and equipment. Based, in part, upon a 2014 study performed for the Company, the Company modified certain salvage values related to both interim and final removal costs and service lives which were approved by the Company's regulators in 2016. The effect of the change in these estimates resulted in reducing depreciation expense approximately
$7.4 million
for the nine months ended September 30, 2016. The Company expects that the 2016 annual reduction to depreciation expense to approximate
$9.5 million
.
Income Taxes
. The Company accounts for federal and state income taxes under the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the estimated future tax consequences of "temporary differences" by applying enacted statutory tax rates for each taxable jurisdiction applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Historically, certain temporary differences are accorded flow-through treatment by the Company's regulators and impact the Company's effective tax rate. The Financial Accounting Standards Board ("FASB") guidance requires that rate-regulated companies record deferred income taxes for temporary differences accorded flow-through treatment at the direction of the regulatory commission. The resulting deferred tax assets and liabilities are recorded at the expected cash flow to be reflected in future rates. Because the Company's regulators have consistently permitted the recovery of tax effects previously flowed-through earnings, the Company has recorded regulatory liabilities and assets offsetting such deferred tax assets and liabilities. During the third quarter of 2016, the Company changed its accounting for state income taxes from the flow-through method to the normalization method in accordance with the Company's regulators in its most recent final orders from the Public Utility Commission of Texas ("PUCT") and the New Mexico Public Regulation Commission ("NMPRC"). Accordingly, the Company recorded deferred state income tax expense as required by normalization, retroactive to January 2016 as provided in the final orders. See Note F for further discussion. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. The Company recognizes tax assets and liabilities for uncertain tax positions in accordance with the recognition and measurement criteria of the FASB guidance for uncertainty in income taxes. See Note F.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosures (in thousands)
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Cash paid (received) for:
|
|
|
|
|
Interest on long-term debt and borrowings under the revolving credit facility
|
$
|
46,867
|
|
|
$
|
41,406
|
|
|
Income tax paid (refunded), net
|
3,337
|
|
|
(272
|
)
|
Non-cash investing and financing activities:
|
|
|
|
|
Sale of Interest in Four Corners Generating Station (a)
|
27,720
|
|
|
—
|
|
|
Changes in accrued plant additions
|
4,277
|
|
|
(13,150
|
)
|
|
Grants of restricted shares of common stock
|
1,236
|
|
|
1,106
|
|
|
|
(a)
|
The Company sold its interest in the Four Corners Generating Station ("Four Corners") for approximately
$32.0 million
based on the book value as defined in the asset purchase agreement entered into by the Company and Arizona Public Service Company ("APS") on February 17, 2015 (the "Purchase and Sale Agreement"). The sales price was adjusted downward by
$7.0 million
and
$19.5 million
, respectively, to reflect APS assumption of the Company's obligation to pay for future plant decommissioning and mine reclamation expense. The sales price was also adjusted downward by approximately
$1.3 million
for closing adjustments and other assets and liabilities assumed by APS. At the closing of the sale, the Company received approximately
$4.2 million
in cash, subject to post-closing adjustments. Subsequently, the Company recorded post-closing adjustments to reflect adjustments to estimated capital expenditures and other assets and liabilities assumed by APS through July 6, 2016, which resulted in a
$1.6 million
refund due to APS.
|
New Accounting Standards.
In April 2015, the
FASB
issued Accounting Standards Update ("ASU") 2015-03, Interest - Imputation of Interest (Topic 715) to simplify the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30), to provide further clarification to ASU 2015-03 as it relates to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements.
The Company
implemented ASU 2015-03 and ASU 2015-15 in the first quarter of 2016, retrospectively to all prior periods presented in
the Company's
Balance Sheet. The implementation of ASU 2015-03 did not have an impact on
the Company's
results of operations.
See Note J.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 can be applied prospectively or retrospectively and is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted
. The Company
elected to early adopt ASU 2015-17 retrospectively in the first quarter of 2016 in
the Company's
Balance Sheet. The implementation of ASU 2015-17 did not have an impact on
the Company's
results of operations.
See Note F.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) to provide a framework that replaces the existing revenue recognition guidance. ASU 2014-09 is the result of a joint effort by the FASB and the International Accounting Standards Board intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. Generally Accepted Accounting Principles ("GAAP") and International Financial Reporting Standards. ASU 2014-09 provides that an entity should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 was originally intended to be effective for annual periods and interim periods within that reporting period beginning after December 15, 2016, for public business entities. In August 2015, FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for all entities by one year. Public business entities will apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods within that reporting period. In March 2016, the FASB issued ASU 2016-08 to clarify the implementation guidance on principal versus agent consideration. In April 2016, the FASB issued ASU 2016-10 to clarify the implementation guidance on identifying performance obligations and licensing. In May
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2016, the FASB issued ASU 2016-11, which rescinds certain SEC Staff Observer comments that are codified in FASB ASC Topic 605 (Revenue Recognition), effective upon adoption of Topic 606. In May 2016, the FASB issued ASU 2016-12, which makes narrow-scope amendments to ASU 2014-09, and provides practical expedients to simplify the transition to the new standard and to clarify certain aspects of the standard. Early adoption of ASU 2014-09 is permitted after December 15, 2016.
The Company has
not selected a transition method and
is
currently assessing the future impact of this ASU.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities to enhance the reporting model for financial instruments by addressing certain aspects of recognition, measurement, presentation, and disclosure. ASU 2016-01 generally requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The guidance for classifying and measuring investments in debt securities and loans is not changed by this ASU, but requires entities to record changes in other comprehensive income. Financial assets and financial liabilities must be separately presented by measurement category on the balance sheet or in the accompanying notes to the financial statements. ASU 2016-01 clarifies the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The standard includes a requirement that businesses must report changes in the fair value of their own liabilities in other comprehensive income instead of earnings, and this is the only provision of the update for which the FASB is permitting early adoption. The remaining provisions of this ASU become effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company is
currently assessing the future impact of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring qualitative and quantitative disclosures on leasing agreements. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous leases guidance for capital leases and operating leases. The impact of leases reported in
the Company's operating results
and statement of cash flows are expected to be similar to previous GAAP. ASU 2016-02 requires the recognition in the statement of financial position, by the lessee, of a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. How leases are recorded in regard to financial position represents a significant change from previous GAAP. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. Implementation of the standard for public companies will be required for annual reporting periods beginning after December 15, 2018 and interim periods within that reporting period. Early adoption of ASU 2016-02 is permitted for all entities. Adoption of the new lease accounting standard will require
the Company
to apply the new standard to the earliest period using a modified retrospective approach.
The Company is
currently assessing the future impact of this ASU.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards either as equity or liabilities, and classification on the statements of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted.
The Company is
currently assessing the future impact of this ASU.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU also makes targeted amendments to the current impairment model for available-for-sale debt securities. For public business entities, the provisions of ASU 2016-13 are effective for fiscal years and interim periods within that reporting period beginning after December 15, 2019. Early implementation is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-13 will be applied in a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is implemented.
The Company is
currently assessing the future impact of this ASU.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The new guidance addresses the following classification issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon bonds; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
separately identifiable cash flows and application of the predominance principle. For public business entities, the provisions of ASU 2016-15 are effective for fiscal years and interim periods within that reporting period beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity elects early adoption of ASU 2016-15 in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. ASU 2016-15 will be applied using a retrospective transition method to each period presented. If it is impracticable to apply ASU 2016-15 retrospectively for some of the issues, the amendments for those issues may be applied prospectively as of the earliest date practicable.
The Company is
currently assessing the future impact of this ASU.
Reclassification.
Certain amounts in the financial statements for 2015 have been reclassified to conform to the 2016 presentation. The Company implemented ASU 2015-03 and ASU 2015-17 in the first quarter of 2016, retrospectively to all periods presented in the Company's financial statements. See Note F and Note J, respectively.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
B. Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive Income (Loss) (net of tax) by component are presented below (in thousands):
|
|
|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
|
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(30,532
|
)
|
|
$
|
28,925
|
|
|
$
|
(11,693
|
)
|
|
$
|
(13,300
|
)
|
|
$
|
(34,331
|
)
|
|
$
|
35,726
|
|
|
$
|
(11,959
|
)
|
|
$
|
(10,564
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
3,493
|
|
|
—
|
|
|
3,493
|
|
|
—
|
|
|
(6,485
|
)
|
|
—
|
|
|
(6,485
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(804
|
)
|
|
(1,687
|
)
|
|
(39
|
)
|
|
(2,530
|
)
|
|
226
|
|
|
(3,472
|
)
|
|
72
|
|
|
(3,174
|
)
|
Balance at end of period
|
$
|
(31,336
|
)
|
|
$
|
30,731
|
|
|
$
|
(11,732
|
)
|
|
$
|
(12,337
|
)
|
|
$
|
(34,105
|
)
|
|
$
|
25,769
|
|
|
$
|
(11,887
|
)
|
|
$
|
(20,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(29,869
|
)
|
|
$
|
27,765
|
|
|
$
|
(11,810
|
)
|
|
$
|
(13,914
|
)
|
|
$
|
(34,884
|
)
|
|
$
|
38,957
|
|
|
$
|
(12,074
|
)
|
|
$
|
(8,001
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
7,459
|
|
|
—
|
|
|
7,459
|
|
|
—
|
|
|
(6,854
|
)
|
|
—
|
|
|
(6,854
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(1,467
|
)
|
|
(4,493
|
)
|
|
78
|
|
|
(5,882
|
)
|
|
779
|
|
|
(6,334
|
)
|
|
187
|
|
|
(5,368
|
)
|
Balance at end of period
|
$
|
(31,336
|
)
|
|
$
|
30,731
|
|
|
$
|
(11,732
|
)
|
|
$
|
(12,337
|
)
|
|
$
|
(34,105
|
)
|
|
$
|
25,769
|
|
|
$
|
(11,887
|
)
|
|
$
|
(20,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2016
|
|
Twelve Months Ended September 30, 2015
|
|
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(34,105
|
)
|
|
$
|
25,769
|
|
|
$
|
(11,887
|
)
|
|
$
|
(20,223
|
)
|
|
$
|
(9,818
|
)
|
|
$
|
39,525
|
|
|
$
|
(12,146
|
)
|
|
$
|
17,561
|
|
|
Other comprehensive income (loss) before reclassifications
|
3,777
|
|
|
12,058
|
|
|
—
|
|
|
15,835
|
|
|
(24,775
|
)
|
|
(4,537
|
)
|
|
—
|
|
|
(29,312
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(1,008
|
)
|
|
(7,096
|
)
|
|
155
|
|
|
(7,949
|
)
|
|
488
|
|
|
(9,219
|
)
|
|
259
|
|
|
(8,472
|
)
|
Balance at end of period
|
$
|
(31,336
|
)
|
|
$
|
30,731
|
|
|
$
|
(11,732
|
)
|
|
$
|
(12,337
|
)
|
|
$
|
(34,105
|
)
|
|
$
|
25,769
|
|
|
$
|
(11,887
|
)
|
|
$
|
(20,223
|
)
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss) for the
three, nine and twelve
months ended
September 30, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income (Loss) Components
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Twelve Months Ended September 30,
|
|
Affected Line Item in the Statement of Operations
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and post-retirement benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit
|
|
$
|
1,663
|
|
|
$
|
1,606
|
|
|
$
|
4,993
|
|
|
$
|
4,931
|
|
|
$
|
6,636
|
|
|
$
|
6,996
|
|
|
(a)
|
|
Net loss
|
|
(1,087
|
)
|
|
(1,966
|
)
|
|
(3,532
|
)
|
|
(6,466
|
)
|
|
(5,688
|
)
|
|
(8,081
|
)
|
|
(a)
|
|
|
|
|
576
|
|
|
(360
|
)
|
|
1,461
|
|
|
(1,535
|
)
|
|
948
|
|
|
(1,085
|
)
|
|
(a)
|
|
Income tax effect
|
|
228
|
|
|
134
|
|
|
6
|
|
|
756
|
|
|
60
|
|
|
597
|
|
|
Income tax expense
|
|
|
|
|
804
|
|
|
(226
|
)
|
|
1,467
|
|
|
(779
|
)
|
|
1,008
|
|
|
(488
|
)
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on sale of securities
|
|
2,072
|
|
|
4,324
|
|
|
5,570
|
|
|
7,887
|
|
|
8,797
|
|
|
11,446
|
|
|
Investment and interest income, net
|
|
|
|
|
2,072
|
|
|
4,324
|
|
|
5,570
|
|
|
7,887
|
|
|
8,797
|
|
|
11,446
|
|
|
Income before income taxes
|
|
Income tax effect
|
|
(385
|
)
|
|
(852
|
)
|
|
(1,077
|
)
|
|
(1,553
|
)
|
|
(1,701
|
)
|
|
(2,227
|
)
|
|
Income tax expense
|
|
|
|
|
1,687
|
|
|
3,472
|
|
|
4,493
|
|
|
6,334
|
|
|
7,096
|
|
|
9,219
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of loss
|
|
(126
|
)
|
|
(118
|
)
|
|
(371
|
)
|
|
(348
|
)
|
|
(490
|
)
|
|
(460
|
)
|
|
Interest on long-term debt and revolving credit facility
|
|
|
|
|
(126
|
)
|
|
(118
|
)
|
|
(371
|
)
|
|
(348
|
)
|
|
(490
|
)
|
|
(460
|
)
|
|
Income before income taxes
|
|
Income tax effect
|
|
165
|
|
|
46
|
|
|
293
|
|
|
161
|
|
|
335
|
|
|
201
|
|
|
Income tax expense
|
|
|
|
|
39
|
|
|
(72
|
)
|
|
(78
|
)
|
|
(187
|
)
|
|
(155
|
)
|
|
(259
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
2,530
|
|
|
$
|
3,174
|
|
|
$
|
5,882
|
|
|
$
|
5,368
|
|
|
$
|
7,949
|
|
|
$
|
8,472
|
|
|
|
|
|
(a) These items are included in the computation of net periodic benefit cost. See Note I, Employee Benefits, for additional information.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
C. Regulation
General
The rates and services of the Company are regulated by incorporated municipalities in Texas, the PUCT, the NMPRC, and the Federal Energy Regulatory Commission ("FERC"). Municipal orders, ordinances and other agreements regarding rates and services adopted by Texas municipalities are subject to review and approval by the PUCT. The FERC has jurisdiction over the Company's wholesale (sales for resale) transactions, transmission service and compliance with federally-mandated reliability standards. The decisions of the PUCT, the NMPRC and the FERC are subject to judicial review.
Texas Regulatory Matters
2015 Texas Retail Rate Case Filing.
On August 10, 2015, the Company filed with the City of El Paso, other municipalities incorporated in its Texas service territory, and the PUCT in Docket No. 44941, a request for an annual increase in non-fuel base revenues of approximately
$71.5 million
. On January 15, 2016, the Company filed its rebuttal testimony modifying the requested increase to
$63.3 million
.
On
August 25, 2016
, the PUCT issued its final order in Docket No. 44941 (the "PUCT Final Order"), as proposed, approving the Joint Motion to Implement Uncontested Amended and Restated Stipulation and Agreement (the "Unopposed Settlement") that was filed with the PUCT on
July 21, 2016
, which was unopposed by the parties to the rate case. The PUCT Final Order provides for the following: (i) an annual non-fuel rate increase of
$37 million
, lower annual depreciation expense of approximately
$8.5 million
, a return on equity of
9.7%
for AFUDC purposes, and inclusion of substantially all new plant in service in rate base; (ii) an additional annual non-fuel base rate increase of
$3.7 million
related to Four Corners costs, which will be collected through a surcharge that terminates on
July 12, 2017
and applies to consumption on and after January 12, 2016; (iii) removal of the separate rate treatment for residential customers with solar systems; (iv) recovery of
$3.1 million
in rate case expenses through a separate surcharge; and (v) recovery of revenues associated with the relate back of rates to consumption on and after
January 12, 2016
through
March 31, 2016
(aggregating
$4.8 million
) through a separate surcharge, all as specified in the Unopposed Settlement. The costs of serving residential customers with solar generation will be addressed in a future proceeding.
Interim rates associated with the annual non-fuel rate increase of
$37 million
became effective on
April 1, 2016
. The additional surcharges associated with the incremental Four Corners costs, rate case expenses and the relate back of rates to consumption on and after January 12, 2016 through March 31, 2016 were implemented on
October 1, 2016
.
Given the uncertainties regarding the ultimate resolution of the rate case, the Company did not recognize the impacts of the Unopposed Settlement in the Statements of Operations until it received the PUCT Final Order on
August 25, 2016
. Accordingly, operating revenues increased approximately
$34.8 million
, depreciation decreased approximately
$7.4 million
, and other expenses, net, increased approximately
$1.9 million
for an aggregate increase in income before income taxes of
$40.3 million
and an increase in net income of
$23.3 million
in the third quarter of 2016 to reflect the effects of the PUCT Final Order.
Energy Efficiency Cost Recovery Factor.
On May 1, 2015, the Company filed its annual application to establish its energy efficiency cost recovery factor for 2016. In addition to projected energy efficiency costs for 2016 and a true-up to prior year actual costs, the Company requested approval of a
$1.0 million
bonus for the 2014 energy efficiency program results in accordance with PUCT rules. This case was assigned PUCT Docket No. 44677. A stipulation and settlement agreement was filed September 24, 2015 and the PUCT approved the settlement on November 5, 2015. The settlement approved by the PUCT includes a performance bonus of
$1.0 million
. The Company recorded the performance bonus as operating revenue in the fourth quarter of 2015.
On April 29, 2016,
the Company filed its annual application to establish its energy efficiency cost recovery factor for 2017. In addition to projected energy efficiency costs for 2017 and true-up to prior year actual costs, the Company requested approval of a
$668 thousand
bonus for the 2015 energy efficiency program results in accordance with PUCT rules. This case was assigned PUCT Docket No. 45885.
Parties in the proceeding, including PUCT staff and the City of El Paso, have filed a settlement in the case that approves the Company's filed proposal with a reduction to the 2015 program bonus of
$155 thousand
. The PUCT approved the settlement on October 28, 2016. The settlement approved by the PUCT includes a performance bonus of
$0.5 million
. The Company recorded the performance bonus as operating revenue in the third quarter of 2016.
Fuel and Purchased Power Costs.
The Company's actual fuel costs, including purchased power energy costs, are recovered from customers through a fixed fuel factor. The PUCT has adopted a fuel cost recovery rule (the "Texas Fuel Rule") that allows the Company to seek periodic adjustments to its fixed fuel factor. The Company can seek to revise its fixed fuel factor based upon
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
the approved formula at least
four
months after its last revision except in the month of December. The Texas Fuel Rule requires the Company to request to refund fuel costs in any month when the over-recovery balance exceeds a threshold material amount and it expects fuel costs to continue to be materially over-recovered. The Texas Fuel Rule also permits the Company to seek to surcharge fuel under-recoveries in any month the balance exceeds a threshold material amount and it expects fuel cost recovery to continue to be materially under-recovered. Fuel over- and under-recoveries are considered material when they exceed
4%
of the previous
twelve
months' fuel costs. All such fuel revenue and expense activities are subject to periodic final review by the PUCT in fuel reconciliation proceedings.
On April 15, 2015, the Company filed a request, which was assigned PUCT Docket No. 44633, to reduce its fixed fuel factor by approximately
24%
to reflect reduced fuel expenses primarily related to a reduction in the price of natural gas used to generate power. The over-recovered balance was below the PUCT's materiality threshold. The reduction in the fixed fuel factor was effective on an interim basis
May 1, 2015
and approved by the PUCT on
May 20, 2015
. As of
September 30, 2016
, the Company had under-recovered fuel costs in the amount of
$8.9 million
for the Texas jurisdiction.
Fuel Reconciliation Proceeding
. On September 27, 2016, the Company filed an application with the PUCT, designated as PUCT Docket No. 46308, to reconcile
$436.6 million
of fuel and purchased power expenses incurred during the period of
April 1, 2013
through
March 31, 2016
.
Montana Power Station Approvals
. T
he Company has received a Certificate of Convenience and Necessity ("CCN") from the PUCT to construct
four
natural gas fired generating units at Montana Power Station ("MPS") in El Paso County, Texas. The Company also obtained air permits from the Texas Commission on Environmental Quality (the "TCEQ") and the U.S. Environmental Protection Agency (the "EPA"). MPS Units 1 and 2 and associated transmission lines and common facilities were completed and placed into service in
March 2015
. MPS Units 3 and 4 were completed and placed into service on
May 3, 2016
and
September 15, 2016
, respectively.
Community Solar.
On June 8, 2015, the Company filed a petition with the PUCT to initiate a community solar program to include construction and ownership of a
3
MW solar photovoltaic system located at MPS. Participation will be on a voluntary basis, and customers will contract for a set capacity (kW) amount and receive all energy produced. This case was assigned PUCT Docket No. 44800. The Company filed a settlement agreement among all parties on July 1, 2016 approving the program, and the PUCT approved the settlement agreement and program on September 1, 2016.
Four Corners Generating Station.
On
February 17, 2015
, the Company and APS entered the Purchase and Sale Agreement providing for purchase by APS of the Company's interests in Four Corners. The Four Corners transaction closed on
July 6, 2016
. See Note D for further details on the sale of Four Corners.
On June 10, 2015, the Company filed an application in Texas requesting reasonableness and public interest findings and certain rate and accounting findings related to the Purchase and Sale Agreement. This case was assigned PUCT Docket No. 44805. Subsequent to the filing of the application, the case has been subject to numerous procedural matters, including a March 23, 2016 order in which the PUCT determined not to dismiss the reasonableness and public interest issues in this docket but to consider the requested rate and accounting findings, including mine reclamation costs, in the Company's next rate case, which is expected to be filed in the first half of 2017. The procedural schedule related to the public interest issues called for a hearing to be held on October 6-7, 2016. However, on September 1, 2016, a motion by parties in the proceeding to suspend the procedural schedule in order to pursue settlement was approved by the PUCT.
At
September 30, 2016
, the regulatory asset associated with the Four Corners mine reclamation costs for our Texas jurisdiction approximated
$7.5 million
. The Company currently continues to recover its mine reclamation costs in Texas under previous orders and decisions of the PUCT. If any future determinations made by our regulators result in changes to how existing regulatory assets or previously incurred costs for Four Corners are recovered in rates, any such changes would be recognized only when it becomes probable future cash flows will change as a result of such regulatory actions.
Other Required Approvals
. The Company has obtained other required approvals for tariffs and approvals as required by the Public Utility Regulatory Act (the "PURA") and the PUCT.
New Mexico Regulatory Matters
2015 New Mexico Rate Case Filing
. On May 11, 2015, the Company filed with the NMPRC in Case No. 15-00127-UT, for an annual increase in non-fuel base rates of approximately
$8.6 million
or
7.1%
. Subsequently, the Company reduced its requested increase in non-fuel base rates to approximately
$6.4 million
. On June 8, 2016, the NMPRC issued its final order approving an
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
annual increase in non-fuel base rates of approximately
$1.1 million
and a decrease in the Company's allowed return on equity to
9.48%
. The final order concludes that all of the Company's new plant in service was reasonable and necessary and therefore would be recoverable in rate base. The Company's rates were approved by the NMPRC effective July 1, 2016 and implemented at such time.
Fuel and Purchased Power Costs.
On January 8, 2014, the NMPRC approved the continuation of the Fuel and Purchased Power Cost Adjustment Clause (the "FPPCAC") without modification in NMPRC Case No. 13-00380-UT. Historically, fuel and purchased power costs were recovered through base rates and a FPPCAC that accounts for changes in the costs of fuel relative to the amount included in base rates. Effective July 1, 2016, with the implementation of the final order of Case No. 15-00127-UT, fuel and purchased power costs will no longer be recovered through base rates but will be completely recovered through the FPPCAC. Fuel and purchased power costs are reconciled to actual costs on a monthly basis and recovered or refunded to customers the second succeeding month. The Company recovers costs related to Palo Verde Unit 3 capacity and energy in New Mexico through the FPPCAC as purchased power using a proxy market price approved in Case No. 13-00380-UT. At
September 30, 2016
, the Company had a net fuel over-recovery balance of
$1.3 million
in New Mexico.
Montana Power Station Approvals.
The Company has received a CCN from the NMPRC to construct
four
units at MPS and the associated transmission lines. The Company also obtained all necessary air permits from the TCEQ and the EPA. A final order in
NMPRC Case No. 13-00297-UT
approving the CCN for MPS Units 3 and 4 was issued on June 11, 2014.
MPS Units 1 and 2 were completed and placed into service in
March 2015
.
MPS Units 3 and 4 were completed and placed into service on
May 3, 2016
and
September 15, 2016
, respectively.
Four Corners.
On
February 17, 2015
, the Company and APS entered into the Purchase and Sale Agreement providing for the purchase by APS of the Company's interests in Four Corners. On April 27, 2015, the Company filed an application in NMPRC Case No. 15-00109-UT requesting all necessary regulatory approvals to sell its ownership interest in Four Corners. On February 2, 2016, the Company filed a joint stipulation with the NMPRC reflecting a settlement agreement among the NMPRC's Utility Division Staff, the Company and the New Mexico Attorney General proposing approval of abandonment and sale of its
seven percent
minority ownership interest in Four Corners Units 4 and 5 and common facilities to APS. A hearing in the case was held on February 16, 2016, and the Hearing Examiner issued a Certification of Stipulation on April 22, 2016 recommending approval of the joint stipulation without modification. On June 15, 2016, the NMPRC issued its final order approving the stipulation. See Note D for further details on the sale of Four Corners.
5 MW Holloman Air Force Base ("HAFB") Facility CCN
. On June 15, 2015, the Company filed a petition with the NMPRC requesting CCN authorization to construct a
5
MW solar-powered generation facility to be located at HAFB in the Company's service territory in New Mexico. The new facility will be a dedicated Company-owned resource serving HAFB. This case was assigned NMPRC Case No. 15-00185-UT. On October 7, 2015, the NMPRC issued a final order accepting the Hearing Examiner’s Recommended Decision to approve the CCN, as modified. The Company and HAFB negotiated a special retail contract, which includes power sales agreement for the facility, to replace the existing load retention agreement and requested approval in NMPRC Case No. 16-00224-UT. On October 5, 2016 the new agreement was approved by the NMPRC. Construction of the solar generation facility will begin in the fourth quarter of 2016 and is expected to be completed in the second quarter of 2017.
Issuance of Long-Term Debt and Guarantee of Debt.
On October 7, 2015, the Company received approval in NMPRC Case No. 15-00280-UT to issue up to
$310 million
in new long-term debt; and to guarantee the issuance of up to
$65 million
of new debt by Rio Grande Resources Trust ("RGRT") to finance future purchases of nuclear fuel and to refinance existing nuclear fuel debt obligations. This approval supersedes prior approvals. Under this authorization, on
March 24, 2016
, the Company issued
$150 million
in aggregate principal amount of
5.00%
Senior Notes due
December 1, 2044
. The net proceeds from the issuance of these senior notes, after deducting the underwriters' commission, were
$158.1 million
. These proceeds include accrued interest of
$2.4 million
and a
$7.1 million
premium before expenses. These senior notes constitute an additional issuance of the Company's
5.00%
Senior Notes due
2044
, of which
$150 million
was previously issued on
December 1, 2014
, for a total principal amount outstanding of
$300 million
.
Other Required Approvals
. The Company has obtained other required approvals for other tariffs, securities transactions, recovery of energy efficiency costs through a base rate rider and other approvals as required by the NMPRC.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Federal Regulatory Matters
Four Corners.
On June 26, 2015, APS filed an application requesting authorization from FERC to purchase
100%
of the Company’s ownership interest in Units 4 and 5 of Four Corners and the associated transmission interconnection facilities and rights. On December 22, 2015, FERC issued an order approving the proposed transaction. The Four Corners transaction closed on
July 6, 2016
. See Note D for further details on the sale of Four Corners.
Public Service Company of New Mexico (
"
PNM
"
) Transmission Rate Case.
On December 31, 2012, PNM filed with FERC to change its method of transmission rate recovery for its transmission delivery services from stated rates to formula rates. The Company takes transmission service from PNM and is among the PNM transmission customers affected by PNM's shift to formula rates. On March 1, 2013, the FERC issued an order rejecting in part PNM's filing, and establishing settlement judge and hearing procedures. On March 20, 2015, PNM filed with FERC a settlement agreement and offer of settlement resolving all issues set for hearing in the proceeding. On March 25, 2015, the Chief Judge issued an order granting PNM's motion to implement the settled rates. On March 17, 2016, FERC issued an order approving the settlement.
Revolving Credit Facility; Issuance of Long-Term Debt and Guarantee of Debt.
On October 19, 2015, the FERC issued an order in Docket No. ES15-66-000 approving the Company’s filing to issue short-term debt under its existing revolving credit facility ("RCF") up to
$400 million
outstanding at any time, to issue up to
$310 million
in long-term debt, and to guarantee the issuance of up to
$65 million
of new long-term debt by RGRT to finance future nuclear fuel purchases. The authorization is effective from
November 15, 2015
through
November 15, 2017
. This approval supersedes prior approvals. Under this authorization, on
March 24, 2016
, the Company issued
$150 million
in aggregate principal amount of
5.00%
Senior Notes due
December 1, 2044
. The net proceeds from the issuance of these senior notes, after deducting the underwriters' commission, were
$158.1 million
. These proceeds include accrued interest of
$2.4 million
and a
$7.1 million
premium before expenses. These senior notes constitute an additional issuance of the Company's
5.00%
Senior Notes due
2044
, of which
$150 million
was previously issued on
December 1, 2014
, for a total principal amount outstanding of
$300 million
.
Other Required Approvals.
The Company has obtained required approvals for rates and tariffs, securities transactions and other approvals as required by the FERC.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
D. Palo Verde and Four Corners
Spent Nuclear Fuel and Waste Disposal.
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "NWPA"), the
U.S. Department of Energy
(the "DOE") is legally obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive waste generated by all domestic power reactors by 1998. The DOE's obligations are reflected in a contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste (the "Standard Contract") with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998.
On
December 19, 2012
, APS, acting on behalf of itself and the Palo Verde Participants, filed a second breach of contract lawsuit against the DOE. This lawsuit sought to recover damages incurred due to the DOE's failure to accept Palo Verde's spent nuclear fuel for the period beginning
January 1, 2007
through
June 30, 2011
. On
August 18, 2014
, APS and the DOE entered into a settlement agreement, stipulating to a dismissal of the lawsuit and payment of
$57.4 million
by the DOE to the Palo Verde Participants for certain specified costs incurred by Palo Verde during the period
January 1, 2007
through
June 30, 2011
. On
October 8, 2014
, the Company received approximately
$9.1 million
, representing its share of the award, of which
$7.9 million
was credited to customers through the applicable fuel adjustment clauses.
On
October 31, 2014
, APS, acting on behalf of itself and the Palo Verde Participants, submitted to the government an additional request for reimbursement of spent nuclear fuel storage costs for the period
July 1, 2011
through
June 30, 2014
. The accepted claim amount was
$42.0 million
. On
June 1, 2015
, the Company received approximately
$6.6 million
, representing its share of the award, of which
$5.8 million
was credited to customers through the applicable fuel adjustment clauses in March 2015. Thereafter, APS will file annual claims for the period July 1 of the then-previous year to June 30 of the then-current year.
On
November 2, 2015
, APS filed a
$12.0 million
claim for the period
July 1, 2014
through
June 30, 2015
. In February 2016, the DOE notified APS of the approval of the claim. Funds related to this claim were received in the
first quarter of 2016
. The Company's share of this claim is approximately
$1.9 million
, of which
$1.6 million
was credited to customers through the applicable fuel adjustment clauses in March 2016.
On
October 31, 2016
, APS filed an
$11.3 million
claim for the period
July 1, 2015
through
June 30, 2016
. The Company's share of this claim is approximately
$1.8 million
. Any reimbursement is anticipated to be received in the second quarter of 2017, and the majority will be credited to customers through the applicable fuel adjustment clauses.
Palo Verde Operations and Maintenance Expense
. Included in other operations and maintenance expenses are expenses associated with Palo Verde as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Three months ended September 30,
|
|
$
|
21,123
|
|
|
$
|
22,016
|
|
Nine months ended September 30,
|
|
67,514
|
|
|
67,702
|
|
Twelve months ended September 30,
|
|
97,451
|
|
|
98,884
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Four Corners.
On
February 17, 2015
, the Company and APS entered into the Purchase and Sale Agreement providing for the purchase by APS of the Company’s interests in Four Corners. Four Corners continued to provide energy to serve the Company's native load up to the closing date. The Four Corners transaction closed on
July 6, 2016
. The sales price was
$32.0 million
based on the net book value as defined in the Purchase and Sale Agreement. The sales price was adjusted downward by
$7.0 million
and
$19.5 million
, respectively, to reflect APS's assumption of the Company's obligation to pay for future plant decommissioning and mine reclamation expenses. The sales price was also adjusted downward by approximately
$1.3 million
for estimated closing adjustments and other assets and liabilities assumed by APS. At the closing, the Company received approximately
$4.2 million
in cash, subject to post-closing adjustments. No significant gain or loss was recorded upon the closing of the sale. APS assumed responsibility for all capital expenditures made after
July 6, 2016
. In addition, APS will indemnify the Company against liabilities and costs related to the future operation of Four Corners. Subsequently, the Company recorded post-closing adjustments to reflect adjustments to estimated capital expenditures and other assets and liabilities assumed by APS through July 6, 2016, which resulted in a $
1.6 million
refund due to APS. See Note C for a discussion of regulatory filings associated with Four Corners.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
E. Common Stock
Dividends.
The Company paid
$12.5 million
and
$11.9 million
in quarterly cash dividends during the
three months ended September 30, 2016
and
2015
, respectively. The Company paid a total of
$37.0 million
and
$49.0 million
in quarterly cash dividends during the nine and twelve months ended
September 30, 2016
, respectively. The Company paid a total of
$35.1 million
and
$46.4 million
in quarterly cash dividends during the nine and twelve months ended
September 30, 2015
, respectively.
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings Per Share
. The basic and diluted earnings per share are presented below (in thousands except for share data):
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic number of common shares outstanding
|
40,363,819
|
|
|
40,289,010
|
|
Dilutive effect of unvested performance awards
|
62,123
|
|
|
40,519
|
|
Diluted number of common shares outstanding
|
40,425,942
|
|
|
40,329,529
|
|
Basic net income per common share:
|
|
|
|
Net income
|
$
|
74,636
|
|
|
$
|
56,740
|
|
Income allocated to participating restricted stock
|
(232
|
)
|
|
(184
|
)
|
Net income available to common shareholders
|
$
|
74,404
|
|
|
$
|
56,556
|
|
Diluted net income per common share:
|
|
|
|
Net income
|
$
|
74,636
|
|
|
$
|
56,740
|
|
Income reallocated to participating restricted stock
|
(232
|
)
|
|
(184
|
)
|
Net income available to common shareholders
|
$
|
74,404
|
|
|
$
|
56,556
|
|
Basic net income per common share:
|
|
|
|
Distributed earnings
|
$
|
0.310
|
|
|
$
|
0.295
|
|
Undistributed earnings
|
1.530
|
|
|
1.105
|
|
Basic net income per common share
|
$
|
1.840
|
|
|
$
|
1.400
|
|
Diluted net income per common share:
|
|
|
|
Distributed earnings
|
$
|
0.310
|
|
|
$
|
0.295
|
|
Undistributed earnings
|
1.530
|
|
|
1.105
|
|
Diluted net income per common share
|
$
|
1.840
|
|
|
$
|
1.400
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic number of common shares outstanding
|
40,344,834
|
|
|
40,267,533
|
|
Dilutive effect of unvested performance awards
|
50,977
|
|
|
32,268
|
|
Diluted number of common shares outstanding
|
40,395,811
|
|
|
40,299,801
|
|
Basic net income per common share:
|
|
|
|
Net income
|
$
|
91,112
|
|
|
$
|
81,270
|
|
Income allocated to participating restricted stock
|
(271
|
)
|
|
(253
|
)
|
Net income available to common shareholders
|
$
|
90,841
|
|
|
$
|
81,017
|
|
Diluted net income per common share:
|
|
|
|
Net income
|
$
|
91,112
|
|
|
$
|
81,270
|
|
Income reallocated to participating restricted stock
|
(271
|
)
|
|
(253
|
)
|
Net income available to common shareholders
|
$
|
90,841
|
|
|
$
|
81,017
|
|
Basic net income per common share:
|
|
|
|
Distributed earnings
|
$
|
0.915
|
|
|
$
|
0.870
|
|
Undistributed earnings
|
1.335
|
|
|
1.140
|
|
Basic net income per common share
|
$
|
2.250
|
|
|
$
|
2.010
|
|
Diluted net income per common share:
|
|
|
|
Distributed earnings
|
$
|
0.915
|
|
|
$
|
0.870
|
|
Undistributed earnings
|
1.335
|
|
|
1.140
|
|
Diluted net income per common share
|
$
|
2.250
|
|
|
$
|
2.010
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30,
|
|
2016
|
|
2015
|
Weighted average number of common shares outstanding:
|
|
|
|
Basic number of common shares outstanding
|
40,332,835
|
|
|
40,255,439
|
|
Dilutive effect of unvested performance awards
|
47,608
|
|
|
24,201
|
|
Diluted number of common shares outstanding
|
40,380,443
|
|
|
40,279,640
|
|
Basic net income per common share:
|
|
|
|
Net income
|
$
|
91,760
|
|
|
$
|
85,511
|
|
Income allocated to participating restricted stock
|
(264
|
)
|
|
(265
|
)
|
Net income available to common shareholders
|
$
|
91,496
|
|
|
$
|
85,246
|
|
Diluted net income per common share:
|
|
|
|
Net income
|
$
|
91,760
|
|
|
$
|
85,511
|
|
Income reallocated to participating restricted stock
|
(264
|
)
|
|
(265
|
)
|
Net income available to common shareholders
|
$
|
91,496
|
|
|
$
|
85,246
|
|
Basic net income per common share:
|
|
|
|
Distributed earnings
|
$
|
1.21
|
|
|
$
|
1.15
|
|
Undistributed earnings
|
1.06
|
|
|
0.97
|
|
Basic net income per common share
|
$
|
2.27
|
|
|
$
|
2.12
|
|
Diluted net income per common share:
|
|
|
|
Distributed earnings
|
$
|
1.21
|
|
|
$
|
1.15
|
|
Undistributed earnings
|
1.06
|
|
|
0.97
|
|
Diluted net income per common share
|
$
|
2.27
|
|
|
$
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of restricted stock awards and performance shares at 100% performance level excluded from the calculation of the diluted number of common shares outstanding because their effect was antidilutive is presented below:
|
|
Three Months Ended
|
|
Nine months ended
|
|
Twelve Months Ended
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Restricted stock awards
|
57,633
|
|
|
65,076
|
|
|
53,285
|
|
|
60,647
|
|
|
50,854
|
|
|
60,742
|
|
Performance shares (a)
|
62,995
|
|
|
59,898
|
|
|
62,995
|
|
|
59,898
|
|
|
62,995
|
|
|
63,111
|
|
|
|
(a)
|
Certain performance shares were excluded from the computation of diluted earnings per share as
no
payouts would have been required based upon performance at the end of each corresponding period.
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
F. Income Taxes
The Company files income tax returns in the United States ("U.S.") federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal and New Mexico jurisdictions for years prior to
2011
. The Company is currently under audit in Texas for tax years
2007
through
2011
. In June 2016, the Arizona Department of Revenue discontinued their audits for tax years
2009
through
2012
. The discontinuance of the audits did not have a material impact on the Company's results of operations or financial position.
For the
three months ended September 30, 2016
and
2015
, the Company’s effective tax rate was
36.6%
and
30.2%
, respectively. For the
nine months ended September 30, 2016
and
2015
, the Company's effective tax rate was
36.1%
and
30.2%
, respectively. For the twelve months ended
September 30, 2016
and
2015
, the Company's effective tax rate was
35.8%
and
30.4%
, respectively. The Company's effective tax rate for all periods differs from the federal statutory tax rate of
35.0%
primarily due to capital gains in the decommissioning trusts which are taxed at the federal rate of
20.0%
, the allowance for equity funds used during construction ("AEFUDC"), state taxes and the issue discussed in the following paragraph.
In the third quarter of 2016, the Company changed its accounting for state income taxes from the flow-through method to the normalization method in accordance with the Company's regulators in its most recent final orders from the PUCT and the NMPRC. Under the flow-through method, the Company previously recorded deferred state income taxes and regulatory liabilities and assets offsetting such deferred state income taxes at the expected cash flow to be reflected in future rates. Upon implementation of normalization, the Company began amortizing the net regulatory asset for deferred state income taxes to deferred income tax expense over a 15 year period as allowed by the regulators. In the third quarter of 2016, the Company began recording deferred state income tax expense as required by normalization, retroactive to January 2016 as provided in the final orders. The impact of the change was additional deferred income tax expense of
$2.8 million
for the
three months ended September 30, 2016
.
In November 2015, the FASB issued new guidance (ASU 2015-17, Balance Sheet Classification of Deferred Taxes) to simplify the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 can be applied prospectively or retrospectively and is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted. The Company elected to implement ASU 2015-17 on a retrospective basis for financial statements issued beginning March 31, 2016. The implementation of ASU 2015-17 did not have a material impact on the Company's results of operations. The impact of ASU 2015-17 on the Company's Balance Sheet was to reclassify
$21.6 million
of current deferred tax assets to long-term deferred tax liabilities at December 31, 2015.
FASB guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recorded a reduction in the unrecognized tax position of
$0.9 million
in the
three months ended September 30, 2016
, and
$0.1 million
in the first quarter of
2015
, related to transmission and distribution costs and other amounts deducted in prior year Texas franchise tax returns. The Company recorded a decrease of
$0.3 million
in the first quarter of
2016
related to tax credits taken and apportionment factors used in prior year Arizona income tax returns, which have been settled through audit. A reconciliation of the
September 30, 2016
and
2015
amounts of unrecognized tax benefits are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at January 1
|
|
$
|
6,000
|
|
|
$
|
5,200
|
|
Additions for tax position related to the current year
|
|
—
|
|
|
—
|
|
Reductions for tax positions related to the current year
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
|
—
|
|
|
—
|
|
Reductions for tax positions
|
|
(1,200
|
)
|
|
(100
|
)
|
Balance at September 30
|
|
$
|
4,800
|
|
|
$
|
5,100
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
G. Commitments, Contingencies and Uncertainties
For a full discussion of commitments and contingencies, see Note K of the Notes to Financial Statements in the
2015
Form 10-K. In addition, see Notes C and D above and Notes C and E of the Notes to Financial Statements in the
2015
Form 10-K regarding matters related to wholesale power sales contracts and transmission contracts subject to regulation and Palo Verde, including decommissioning, spent nuclear fuel and waste disposal, and liability and insurance matters.
Power Purchase and Sale Contracts
To supplement its own generation and operating reserve requirements, and to meet required renewable portfolio standards, the Company engages in power purchase arrangements which may vary in duration and amount based on an evaluation of the Company's resource needs, the economics of the transactions, and specific renewable portfolio requirements. For a full discussion of power purchase and sale contracts that the Company has entered into with various counterparties, see Note K of the Notes to Financial Statements in the 2015 Form 10-K.
Environmental Matters
General.
The Company is subject to extensive laws, regulations, and permit requirements with respect to air and greenhouse gas emissions, water discharges, soil and water quality, waste management and disposal, natural resources, and other environmental matters by federal, state, regional, tribal, and local authorities. Failure to comply with such laws, regulations, and requirements can result in actions by authorities or other third parties that might seek to impose on the Company administrative, civil, and/or criminal penalties or other sanctions. In addition, releases of pollutants or contaminants into the environment can result in costly cleanup liabilities. These laws, regulations, and requirements are subject to change through modification or reinterpretation, or the introduction of new laws and regulations and, as a result, the Company may face additional capital and operating costs to comply. For a more detailed discussion of certain key environmental issues, laws, and regulations facing the Company, see Note K of the Notes to Financial Statements in the
2015
Form 10-K.
Clean Air Interstate Rule/Cross State Air Pollution Rule
. The EPA promulgated the Cross-State Air Pollution Rule ("CSAPR") in August 2011, which rule involves requirements to limit emissions of nitrogen oxides ("NOx") and sulfur dioxide ("SO2") from certain of the Company's power plants in Texas and/or purchase allowances representing other parties' emissions reductions. CSAPR was intended to replace the EPA's 2005 Clean Air Interstate Rule ("CAIR"). While the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") vacated CSAPR in August 2012 and allowed CAIR to stand until the EPA issued a proper replacement, on April 29, 2014, the U.S. Supreme Court reversed and upheld CSAPR, remanding certain portions of CSAPR to the D.C. Circuit for further consideration. On June 26, 2014, the EPA filed a motion asking the D.C. Circuit to lift its stay on CSAPR, and on October 23, 2014, the D.C Circuit lifted its stay of CSAPR. On July 28, 2015, the D.C. Circuit ruled that the EPA's emissions budgets for
13
states including Texas are invalid, but left the rule in place on remand. On October 26, 2016, the EPA published its final CSAPR Update Rule with an effective date of December 27, 2016. While we are unable to determine the full impact of this rule at this time, the Company believes it is currently positioned to comply with CSAPR.
National Ambient Air Quality Standards ("NAAQS").
Under the Clean Air Act ("CAA"), the EPA sets NAAQS for
six
criteria pollutants considered harmful to public health and the environment, including particulate matter ("PM"), NOx, carbon monoxide ("CO"), ozone, and SO2. NAAQS must be reviewed by the EPA at
five
-year intervals. In 2010, the EPA tightened the NAAQS for both nitrogen dioxide ("NO2") and SO2. The EPA is considering a 1-hour secondary NAAQS for NO2 and SO2. In January 2013, the EPA tightened the NAAQS for fine PM. On October 1, 2015, following on its November 2014 proposal, the EPA released a final rule tightening the primary and secondary NAAQS for ground-level ozone from its 2008 standard levels of
75
parts per billion ("ppb") to
70
ppb. Ozone is the main component of smog. While not directly emitted into the air, it forms from precursors, including NOx and volatile organic compounds, in combination with sunlight. The EPA is expected to make attainment/nonattainment designations for the revised ozone standards by October 1, 2017. While it is currently unknown how the areas in which we operate will ultimately be designated, for nonattainment areas classified as "Moderate" and above, states, and any tribes that choose to do so, are expected to be required to complete development of implementation plans in the 2020-2021 timeframe. Most nonattainment areas are expected to have until 2020 or 2023 to meet the primary (health) standard, with the exact attainment date varying based on the ozone level in the area. The Company continues to evaluate what impact these final and proposed NAAQS could have on its operations. If the Company is required to install additional equipment to control emissions at its facilities, the NAAQS, individually or in the aggregate, could have a material impact on its operations and financial results.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Other Laws and Regulations and Risks.
The Company sold its interest in Four Corners to APS on
July 6, 2016
. The Company no longer owns any coal-fired generation, and therefore has reduced its exposure to a number of environmental matters. As of the closing date of the sale, the Company's environmental liabilities associated with Four Corners were limited to conditions that existed at the time of the sale. The Company's liability is limited to the portion thereof for which the Company would have been financially responsible if Four Corners had fully ceased operations on
July 6, 2016
. The Company believes it is not responsible for a significant portion of the compliance or ongoing operational costs associated with the Mercury and Air Toxics Standards ("MATS"), the Coal Combustion Residue ("CCR") Rule, or the revised Wastewater Effluent Limitation Guidelines ("ELG"). While the outcome of these matters cannot be predicted with certainty, the Company does not expect the MATS, CCR, or ELG rules to have a significant impact on its financial condition or results of operations, nor does the Company expect that ongoing lawsuits between environmental organizations, the Office of Surface Mining Reclamation and Enforcement, the Bureau of Indian Affairs, and other federal agencies will have a significant impact on its financial condition or results of operations.
Mercury and Air Toxics Standards.
The operation of coal-fired power plants, such as Four Corners, results in emissions of mercury and other air toxics. In December 2011, the EPA finalized the MATS Rule for oil- and coal-fired power plants, which requires significant reductions in emissions of mercury and other air toxics. Several judicial and other challenges have been made to this rule, and on June 29, 2015, the U.S. Supreme Court remanded the rule to the D.C. Circuit Court. On December 15, 2015, the D.C. Circuit Court issued an order remanding the rule to the EPA but did not vacate the rule during remand. On April 15, 2016, the EPA completed a cost-benefit analysis of the MATS rule and reaffirmed its finding that the rule is "appropriate and necessary," which will be reviewed by the D.C. Circuit Court. The legal status of the MATS Rule notwithstanding, the Company believes, under the terms of the Purchase and Sale Agreement and after the sale, as a former owner, that the Company is not responsible for a significant portion of the costs under the MATS Rule. Accordingly, the Company does not expect the MATS Rule to have a significant impact on its financial condition or results of operations.
Coal Combustion Waste.
On October 19, 2015, the EPA's final rule regulating the disposal of CCR (the "CCR Rule") from electric utilities as solid waste took effect. As of the effective date of the CCR Rule, the Company had a
7%
ownership interest in Units 4 and 5 of Four Corners, the only coal-fired generating facility for which the Company had an ownership interest subject to the CCR Rule. The Company sold its entire ownership interest in Four Corners to APS on
July 6, 2016
. The CCR Rule requires plant owners to treat coal combustion residuals as Subtitle D (as opposed to a more costly Subtitle C) waste. The Company, however, believes, under the terms of the Purchase Agreement and after the sale, as a former owner, that the Company is not responsible for a significant portion of the costs under the CCR Rule, such as ongoing operational costs after
July 6, 2016
. Accordingly, the Company does not expect the CCR Rule to have a significant impact on its financial condition or results of operations.
On November 3, 2015, the EPA published a final rule revising wastewater effluent limitation guidelines for steam electric power generators (the "Revised ELG Rule"). The Revised ELG Rule establishes requirements for wastewater streams from certain processes at affected facilities, including limits on toxic metals in wastewater discharges. Facilities must comply with the Revised ELG Rule between 2018 and 2023. The EPA anticipates that the new requirements in the Revised ELG Rule will only affect certain coal-fired steam electric power plants. Because the Company does not have an interest in Four Corners after the closing of the sale in
July 2016
, the Company does not expect the Revised ELG Rule will have a significant impact on its financial condition or results of operations.
In 2012, several environmental groups filed a lawsuit in federal district court against the Office of Surface Mining Reclamation and Enforcement ("OSM") of the U.S. Department of the Interior, challenging OSM’s 2012 approval of a permit revision which allowed for the expansion of mining operations into a new area of the mine that serves Four Corners ("Area IV North"). In April 2015, the court issued an order invalidating the permit revision, thereby prohibiting mining in Area IV North until OSM takes action to cure the defect in its permitting process identified by the court. On December 29, 2015, OSM took action to cure the defect in its permitting process by issuing a revised environmental assessment and finding of no new significant impact, and reissued the permit. This action is subject to possible judicial review. On March 30, 2016, the U.S. Court of Appeals vacated and dismissed the federal court decision that halted operations in Area IV North at the Navajo Mine.
On April 20, 2016, the same environmental groups filed a new complaint in Arizona's federal district court, challenging multiple permits and approvals issued to both the Navajo Mine and Four Corners authorizing operations from
July 2016
onwards. The complaint seeks to enjoin federal agencies, including the OSM and Bureau of Indian Affairs, from authorizing any element of the power plant or mine without further environmental impact analysis.
Climate Change.
In recent years, there has been increasing public debate regarding the potential impact of global climate change. There has been a wide-ranging policy debate, both nationally and internationally, regarding the impact of GHG and possible
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
means for their regulation. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues. Most recently, in 2015, the United States participated in the United Nations Conference on Climate Change, which led to creation of the Paris Agreement. On April 22, 2016,
175
countries, including the United States, signed the Paris Agreement, signaling their intent to join. Those countries that subsequently ratify the agreement will be required to review and "represent a progression" in their intended nationally determined contributions, which set GHG emission reduction goals, every
five
years, beginning in 2020.
The U.S. federal government has either considered, proposed, and/or finalized legislation or regulations limiting GHG emissions, including carbon dioxide. In particular, the U.S. Congress has considered legislation to restrict or regulate GHG emissions. In the past few years, the EPA began using the CAA to regulate carbon dioxide and other GHG emissions, such as the 2009 GHG Reporting Rule and the EPA's sulfur hexafluoride ("SF6") reporting rule, both of which apply to the Company, as well as the EPA's 2010 actions to impose permitting requirements on new and modified sources of GHG emissions. After announcing his plan to address climate change in 2013, the President directed the EPA to issue proposals for GHG rulemaking addressing power plants. In October 2015, the EPA published a final rule establishing new source performance standards ("NSPS") limiting CO2 emissions from new, modified, and reconstructed electric generating units. In October 2015, the EPA also published a rule establishing guidelines for states to regulate CO2 emissions from existing power plants, as well as a proposed "federal plan" to address CO2 emissions from affected units in those states that do not submit an approvable compliance plan. The standards for existing plants are known as the Clean Power Plan ("CPP"), under which rule interim emissions performance rates must be achieved beginning in 2022 and final emissions performance rates by 2030. Legal challenges to the CPP were filed by groups of states and industry members. On February 9, 2016, the U.S. Supreme Court issued a decision to stay the rule until legal issues are resolved. We cannot at this time determine the impact the CPP and related rules and legal challenges may have on our financial position, results of operations, or cash flows.
H. Litigation
The Company is involved in various legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. The Company regularly analyzes current information and, as necessary, makes provisions in its financial statements for probable liabilities for the eventual disposition of these matters. While the outcome of these matters cannot be predicted with certainty, based upon a review of the matters and applicable insurance coverage, the Company believes that none of these matters will have a material adverse effect on the financial position, results of operations or cash flows of the Company. The Company expenses legal costs, including expenses related to loss contingencies, as they are incurred.
See Notes C and G above and Notes C and K of the Notes to Financial Statements in the 2015 Form 10-K for discussion of the effects of government legislation and regulation on the Company.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
I. Employee Benefits
Retirement Plans
The net periodic benefit cost recognized for the
three, nine and twelve months ended
September 30, 2016
and
2015
is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Twelve Months Ended
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2,191
|
|
|
$
|
2,394
|
|
|
$
|
6,001
|
|
|
$
|
6,594
|
|
|
$
|
8,199
|
|
|
$
|
8,707
|
|
Interest cost
|
3,250
|
|
|
3,622
|
|
|
9,780
|
|
|
10,872
|
|
|
13,403
|
|
|
14,563
|
|
Expected return on plan assets
|
(4,734
|
)
|
|
(4,951
|
)
|
|
(14,159
|
)
|
|
(14,846
|
)
|
|
(19,108
|
)
|
|
(19,528
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
1,730
|
|
|
2,485
|
|
|
5,505
|
|
|
7,985
|
|
|
8,167
|
|
|
10,267
|
|
Prior service benefit
|
(875
|
)
|
|
(855
|
)
|
|
(2,630
|
)
|
|
(2,630
|
)
|
|
(3,506
|
)
|
|
(3,506
|
)
|
Net periodic benefit cost
|
$
|
1,562
|
|
|
$
|
2,695
|
|
|
$
|
4,497
|
|
|
$
|
7,975
|
|
|
$
|
7,155
|
|
|
$
|
10,503
|
|
During the
nine months ended
September 30, 2016
, the Company contributed
$8.8 million
of its projected
$9.4 million
2016
annual contribution to its retirement plans.
Other Postretirement Benefits
The net periodic benefit cost recognized for the
three, nine and twelve months ended
September 30, 2016
and
2015
is made up of the components listed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Twelve Months Ended
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
749
|
|
|
$
|
841
|
|
|
$
|
2,179
|
|
|
$
|
2,591
|
|
|
$
|
3,042
|
|
|
$
|
3,302
|
|
Interest cost
|
871
|
|
|
976
|
|
|
2,616
|
|
|
3,026
|
|
|
3,625
|
|
|
4,142
|
|
Expected return on plan assets
|
(452
|
)
|
|
(503
|
)
|
|
(1,372
|
)
|
|
(1,553
|
)
|
|
(1,889
|
)
|
|
(2,082
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit
|
(788
|
)
|
|
(751
|
)
|
|
(2,363
|
)
|
|
(2,301
|
)
|
|
(3,130
|
)
|
|
(3,490
|
)
|
Net gain
|
(643
|
)
|
|
(519
|
)
|
|
(1,973
|
)
|
|
(1,519
|
)
|
|
(2,479
|
)
|
|
(2,186
|
)
|
Net periodic benefit cost (benefit)
|
$
|
(263
|
)
|
|
$
|
44
|
|
|
$
|
(913
|
)
|
|
$
|
244
|
|
|
$
|
(831
|
)
|
|
$
|
(314
|
)
|
During the
nine months ended
September 30, 2016
, the Company contributed
$1.6 million
of its projected
$1.7 million
2016
annual contribution to its other post retirement benefits plan.
During October 2016, the Company approved and communicated a plan amendment that is expected to result in a remeasurement. Effective January 1, 2017, retirees and dependents that are less than
65
years of age will be offered a choice between a $1,000 and $2,250 deductible plan. Additionally, retirees and dependents that are
65
years of age or greater will be covered by a fully insured Medicare advantage plan. The postretirement benefit obligation is estimated to decrease by approximately
$32.7 million
as a result of the October 1, 2016 remeasurement. The effects of the remeasurement will be recorded in the fourth quarter of 2016.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
J. Financial Instruments and Investments
The FASB guidance requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, investment in debt securities, accounts receivable, decommissioning trust funds, long-term debt, short-term borrowings under the RCF, accounts payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Investments in debt securities and decommissioning trust funds are carried at estimated fair value.
Long-Term Debt and Short-Term Borrowings Under the RCF.
The fair values of the Company's long-term debt and short-term borrowings under the RCF are based on estimated market prices for similar issues and are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying
Amount (1)
|
|
Estimated
Fair
Value
|
|
Carrying
Amount (1)
|
|
Estimated
Fair
Value
|
Pollution Control Bonds
|
$
|
190,706
|
|
|
$
|
211,050
|
|
|
$
|
190,499
|
|
|
$
|
212,624
|
|
Senior Notes
|
993,004
|
|
|
1,207,162
|
|
|
837,475
|
|
|
829,864
|
|
RGRT Senior Notes (2)
|
94,768
|
|
|
100,465
|
|
|
94,686
|
|
|
100,345
|
|
RCF (2)
|
55,192
|
|
|
55,192
|
|
|
141,738
|
|
|
141,738
|
|
Total
|
$
|
1,333,670
|
|
|
$
|
1,573,869
|
|
|
$
|
1,264,398
|
|
|
$
|
1,284,571
|
|
_______________
|
|
(1)
|
The Company implemented ASU 2015-03, Interest - Imputation of Interest, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The impact of ASU 2015-03 on the Company's Balance Sheet was to reclassify
$11.6 million
of other deferred charges to long-term debt, net of current portion at December 31, 2015.
|
|
|
(2)
|
Nuclear fuel financing, as of
September 30, 2016
and
December 31, 2015
, is funded through the
$95 million
RGRT Senior Notes and
$36.2 million
and
$33.7 million
, respectively under the RCF. As of
September 30, 2016
,
$19.0 million
was outstanding under the RCF for working capital or general corporate purposes. As of
December 31, 2015
,
$108.0 million
was outstanding under the RCF for working capital or general corporate purposes. The interest rate on the Company's borrowings under the RCF is reset throughout the quarter reflecting c
urrent market rates. Consequently, the carrying value approximates fair value.
|
Marketable Securities.
The Company's marketable securities, included in decommissioning trus
t funds in the Balance Sheets, are reported at fair value which was
$254.6 million
and
$239.0 million
at
September 30, 2016
and
December 31, 2015
, respectively. These securities are classified as available for sale and recorded at their estimated fair value using the FASB guidance for certain investments in debt and equity securities. The reported fair values include gross unrealized losses on marketable securities whose impairment the Company has deemed to be temporary. The tables below present the gross unrealized losses and the fair value of these securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Description of Securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
1,028
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,028
|
|
|
$
|
(9
|
)
|
U.S. Government Bonds
|
8,728
|
|
|
(151
|
)
|
|
12,300
|
|
|
(526
|
)
|
|
21,028
|
|
|
(677
|
)
|
Municipal Obligations
|
4,692
|
|
|
(43
|
)
|
|
8,171
|
|
|
(515
|
)
|
|
12,863
|
|
|
(558
|
)
|
Corporate Obligations
|
3,380
|
|
|
(50
|
)
|
|
2,381
|
|
|
(138
|
)
|
|
5,761
|
|
|
(188
|
)
|
Total Debt Securities
|
17,828
|
|
|
(253
|
)
|
|
22,852
|
|
|
(1,179
|
)
|
|
40,680
|
|
|
(1,432
|
)
|
Common Stock
|
1,393
|
|
|
(124
|
)
|
|
—
|
|
|
—
|
|
|
1,393
|
|
|
(124
|
)
|
Institutional Equity Funds-International Equity
|
22,847
|
|
|
(249
|
)
|
|
—
|
|
|
—
|
|
|
22,847
|
|
|
(249
|
)
|
Total Temporarily Impaired Securities
|
$
|
42,068
|
|
|
$
|
(626
|
)
|
|
$
|
22,852
|
|
|
$
|
(1,179
|
)
|
|
$
|
64,920
|
|
|
$
|
(1,805
|
)
|
_________________
|
|
(1)
|
Includes
104
securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Description of Securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
9,383
|
|
|
$
|
(97
|
)
|
|
$
|
1,113
|
|
|
$
|
(47
|
)
|
|
$
|
10,496
|
|
|
$
|
(144
|
)
|
U.S. Government Bonds
|
24,094
|
|
|
(310
|
)
|
|
14,272
|
|
|
(623
|
)
|
|
38,366
|
|
|
(933
|
)
|
Municipal Obligations
|
8,286
|
|
|
(160
|
)
|
|
7,388
|
|
|
(446
|
)
|
|
15,674
|
|
|
(606
|
)
|
Corporate Obligations
|
6,058
|
|
|
(722
|
)
|
|
2,307
|
|
|
(228
|
)
|
|
8,365
|
|
|
(950
|
)
|
Total Debt Securities
|
47,821
|
|
|
(1,289
|
)
|
|
25,080
|
|
|
(1,344
|
)
|
|
72,901
|
|
|
(2,633
|
)
|
Common Stock
|
3,584
|
|
|
(344
|
)
|
|
—
|
|
|
—
|
|
|
3,584
|
|
|
(344
|
)
|
Institutional Equity Funds-International Equity
|
22,454
|
|
|
(768
|
)
|
|
—
|
|
|
—
|
|
|
22,454
|
|
|
(768
|
)
|
Total Temporarily Impaired Securities
|
$
|
73,859
|
|
|
$
|
(2,401
|
)
|
|
$
|
25,080
|
|
|
$
|
(1,344
|
)
|
|
$
|
98,939
|
|
|
$
|
(3,745
|
)
|
_________________
|
|
(2)
|
Includes
133
securities.
|
The Company monitors the length of time specific securities trade below their cost basis along with the amount and percentage of the unrealized loss in determining if a decline in fair value of marketable securities below recorded cost is considered to be other than temporary. The Company recognizes impairment losses on certain of its securities deemed to be other than temporary. In accordance with the FASB guidance, these impairment losses are recognized in net income, and a lower cost basis is established for these securities. In addition, the Company will research the future prospects of individual securities as necessary. The Company does not anticipate expending monies held in trust before 2044 or a later period when decommissioning of Palo Verde begins.
For the
three, nine and twelve months ended September 30, 2016
and
2015
, the Company recognized other than temporary impairment losses on its available-for-sale securities as follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Twelve Months Ended
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Unrealized holding losses included in pre-tax income
|
$
|
(196
|
)
|
|
$
|
—
|
|
|
$
|
(352
|
)
|
|
$
|
—
|
|
|
$
|
(690
|
)
|
|
$
|
—
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The reported securities also include gross unrealized gains on marketable securities which have not been recognized in the Company's net income. The table below presents the unrecognized gross unrealized gains and the fair value of these securities, aggregated by investment category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Fair
Value
|
|
Unrealized
Gains
|
|
Fair
Value
|
|
Unrealized
Gains
|
Description of Securities:
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
16,772
|
|
|
$
|
701
|
|
|
$
|
9,589
|
|
|
$
|
438
|
|
U.S. Government Bonds
|
35,711
|
|
|
1,285
|
|
|
12,033
|
|
|
136
|
|
Municipal Obligations
|
9,273
|
|
|
398
|
|
|
8,671
|
|
|
332
|
|
Corporate Obligations
|
18,368
|
|
|
1,347
|
|
|
10,110
|
|
|
368
|
|
Total Debt Securities
|
80,124
|
|
|
3,731
|
|
|
40,403
|
|
|
1,274
|
|
Common Stock
|
66,055
|
|
|
34,418
|
|
|
72,636
|
|
|
37,001
|
|
Equity Mutual Funds
|
35,552
|
|
|
1,995
|
|
|
18,853
|
|
|
91
|
|
Cash and Cash Equivalents
|
7,975
|
|
|
—
|
|
|
8,204
|
|
|
—
|
|
Total
|
$
|
189,706
|
|
|
$
|
40,144
|
|
|
$
|
140,096
|
|
|
$
|
38,366
|
|
The Company's marketable securities include investments in municipal, corporate and federal debt obligations. Substantially all of the Company's mortgage-backed securities, based on contractual maturity, are due in
ten years
or more. The mortgage-backed securities have an estimated weighted average maturity which generally range from
two years
to
six years
and reflects anticipated future prepayments. The contractual year for maturity of these available-for-sale securities as of
September 30, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2016
|
|
2017
through
2020
|
|
2021 through 2025
|
|
2026 and Beyond
|
Municipal Debt Obligations
|
$
|
22,136
|
|
|
$
|
417
|
|
|
$
|
7,909
|
|
|
$
|
12,730
|
|
|
$
|
1,080
|
|
Corporate Debt Obligations
|
24,129
|
|
|
—
|
|
|
5,501
|
|
|
9,941
|
|
|
8,687
|
|
U.S. Government Bonds
|
56,739
|
|
|
—
|
|
|
29,297
|
|
|
14,542
|
|
|
12,900
|
|
The Company's marketable securities in its decommissioning trust funds are sold from time to time and the Company uses the specific identification basis to determine the amount to reclassify from accumulated other comprehensive income into net income. The proceeds from the sale of these securities during the three, nine, and twelve months ended September 30, 2016 and 2015 and the related effects on pre-tax income are as follows (in thousands):
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Twelve Months Ended
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Proceeds from sales or maturities of available-for-sale securities
|
$
|
19,453
|
|
|
$
|
26,618
|
|
|
$
|
60,165
|
|
|
$
|
63,776
|
|
|
$
|
98,956
|
|
|
$
|
124,732
|
|
Gross realized gains included in pre-tax income
|
$
|
2,446
|
|
|
$
|
4,515
|
|
|
$
|
6,687
|
|
|
$
|
8,330
|
|
|
$
|
10,736
|
|
|
$
|
12,467
|
|
Gross realized losses included in pre-tax income
|
(178
|
)
|
|
(191
|
)
|
|
(765
|
)
|
|
(443
|
)
|
|
(1,249
|
)
|
|
(1,021
|
)
|
Gross unrealized losses included in pre-tax income
|
(196
|
)
|
|
—
|
|
|
(352
|
)
|
|
—
|
|
|
(690
|
)
|
|
—
|
|
Net gains included in pre-tax income
|
$
|
2,072
|
|
|
$
|
4,324
|
|
|
$
|
5,570
|
|
|
$
|
7,887
|
|
|
$
|
8,797
|
|
|
$
|
11,446
|
|
Net unrealized holding gains (losses) included in accumulated other comprehensive income
|
$
|
4,313
|
|
|
$
|
(8,092
|
)
|
|
$
|
9,293
|
|
|
$
|
(8,641
|
)
|
|
$
|
15,028
|
|
|
$
|
(5,779
|
)
|
Net gains reclassified from accumulated other comprehensive income
|
(2,072
|
)
|
|
(4,324
|
)
|
|
(5,570
|
)
|
|
(7,887
|
)
|
|
(8,797
|
)
|
|
(11,446
|
)
|
Net gains (losses) in other comprehensive
income
|
$
|
2,241
|
|
|
$
|
(12,416
|
)
|
|
$
|
3,723
|
|
|
$
|
(16,528
|
)
|
|
$
|
6,231
|
|
|
$
|
(17,225
|
)
|
Fair Value Measurements.
The FASB guidance requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company's decommissioning trust investments and investments in debt securities which are included in deferred charges and other assets on the Balance Sheets. The Company has no liabilities that are measured at fair value on a recurring basis. The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
|
•
|
Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the nuclear decommissioning trust investments in active exchange-traded equity securities, mutual funds and U.S. Treasury securities that are in a highly liquid and active market. The Institutional Funds are valued using the NAV provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets. During the third quarter of 2016, the Company re-evaluated the decommissioning trust funds investments as to whether they have a readily determinable fair value. Based on that re-evaluation, certain accounting policy, and NAV disclosures have been revised and now the investments in the Institutional Funds are categorized as Level 1.
|
|
|
•
|
Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Financial assets utilizing Level 2 inputs include the nuclear decommissioning trust investments in fixed income securities. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences.
|
|
|
•
|
Level 3 – Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analysis. Financial assets utilizing Level 3 inputs are the Company's investment in debt securities.
|
The securities in the Company's decommissioning trust funds are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. The FASB guidance identifies this valuation technique as the "market approach" with observable inputs. The Company analyzes available-for-sale securities to determine if losses are other than temporary.
The fair value of the Company's decommissioning trust funds and investments in debt securities at
September 30, 2016
and
December 31, 2015
, and the level within the three levels of the fair value hierarchy defined by the FASB guidance are presented in the table below (in thousands):
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
Fair Value as of September 30, 2016
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Trading Securities:
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
$
|
1,398
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,398
|
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Government Bonds
|
$
|
56,739
|
|
|
$
|
56,739
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal Agency Mortgage Backed Securities
|
17,800
|
|
|
—
|
|
|
17,800
|
|
|
—
|
|
Municipal Bonds
|
22,136
|
|
|
—
|
|
|
22,136
|
|
|
—
|
|
Corporate Asset Backed Obligations
|
24,129
|
|
|
—
|
|
|
24,129
|
|
|
—
|
|
Subtotal Debt Securities
|
120,804
|
|
|
56,739
|
|
|
64,065
|
|
|
—
|
|
Common Stock
|
67,448
|
|
|
67,448
|
|
|
—
|
|
|
—
|
|
Equity Mutual Funds
|
35,552
|
|
|
35,552
|
|
|
—
|
|
|
—
|
|
Institutional Funds-International Equity
|
22,847
|
|
|
22,847
|
|
|
—
|
|
|
—
|
|
Cash and Cash Equivalents
|
7,975
|
|
|
7,975
|
|
|
—
|
|
|
—
|
|
Total Available for Sale
|
$
|
254,626
|
|
|
$
|
190,561
|
|
|
$
|
64,065
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
Fair Value as of December 31, 2015
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Trading Securities:
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
$
|
1,543
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,543
|
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Government Bonds
|
$
|
50,399
|
|
|
$
|
50,399
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal Agency Mortgage Backed Securities
|
20,085
|
|
|
—
|
|
|
20,085
|
|
|
—
|
|
Municipal Bonds
|
24,345
|
|
|
—
|
|
|
24,345
|
|
|
—
|
|
Corporate Asset Backed Obligations
|
18,475
|
|
|
—
|
|
|
18,475
|
|
|
—
|
|
Subtotal Debt Securities
|
113,304
|
|
|
50,399
|
|
|
62,905
|
|
|
—
|
|
Common Stock
|
76,220
|
|
|
76,220
|
|
|
—
|
|
|
—
|
|
Equity Mutual Funds
|
18,853
|
|
|
18,853
|
|
|
—
|
|
|
—
|
|
Institutional Funds-International Equity
|
22,454
|
|
|
22,454
|
|
|
—
|
|
|
—
|
|
Cash and Cash Equivalents
|
8,204
|
|
|
8,204
|
|
|
—
|
|
|
—
|
|
Total Available for Sale
|
$
|
239,035
|
|
|
$
|
176,130
|
|
|
$
|
62,905
|
|
|
$
|
—
|
|
There were
no
transfers in or out of Level 1 and Level 2 fair value measurements categories due to changes in observable inputs during the
three, nine and twelve
month periods ended
September 30, 2016
and
2015
. There were
no
purchases, sales, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the
three, nine and twelve months ended
September 30, 2016
and
2015
.