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, 2016
(the "
2016
Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the
2016
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
March 31, 2017
and
December 31, 2016
; the results of its operations and comprehensive operations for the
three and twelve months ended
March 31, 2017
and
2016
; and its cash flows for the
three months ended
March 31, 2017
and
2016
. The results of operations and comprehensive operations for the
three
months ended
March 31, 2017
and the cash flows for the
three months ended
March 31, 2017
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
$17.4 million
at
March 31, 2017
and
$21.0 million
at
December 31, 2016
. 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. Depreciation is provided on a straight-line basis over the estimated remaining lives of the assets (ranging in average from
5
to
48
years). When property subject to composite depreciation is retired or otherwise disposed of in the normal course of business, its cost, together with the cost of removal, less salvage, is charged to accumulated depreciation. For other property dispositions, the applicable cost and accumulated depreciation is removed from the balance sheet accounts and a gain or loss is recognized. During 2016, depreciation and amortization decreased due to changes in depreciation rates approved in the most recent final orders from the Public Utility Commission of Texas ("PUCT") and the New Mexico Public Regulation Commission ("NMPRC") and changes in the estimated life of certain intangible software assets.
New Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The Company adopted the new standard effective January 1, 2017. The adoption of the new standard did not have a material impact on the Company’s financial condition, results of operations or cash flows. The cumulative effect of the adoption of the new standard was to increase net operating loss carryforward deferred tax assets and retained earnings by
$0.2 million
on January 1, 2017.
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, and has since modified the standard with several ASUs.The standard 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. More specifically, the standard requires entities to recognize revenue through the application of a five-step model, which includes the: (i) identification of the contract; (ii) identification of the performance obligations; (iii) determination
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) the recognition of revenue as the entity satisfies the performance obligations. The Company plans to adopt the new standard for reporting periods beginning after December 15, 2017. The Company has not concluded which transition method it will elect but it currently anticipates using the modified retrospective approach.
The Company is currently in the process of evaluating the impact of the new standard on its various revenue and cash flow streams, including the evaluation of the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance. Tariff sales to customers are determined to be in the scope of the new standard and represent a significant portion of the Company’s total operating revenues. The Company has not completed its final evaluation of tariff sales under the new guidance. Further, the Company is still considering the impact of guidance on several industry-related accounting issues, including the accounting for contributions in aid of construction ("CIAC"), assessing the collectability criterion and the presentation of revenues associated with alternative revenue programs. The Company's initial assessments may change as it executes its implementation plan and new guidance is provided by the American Institute of Certified Public Accountants Power and Utilities Industry Task Force.
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 provisions of this ASU become effective for reporting periods beginning after December 15, 2017. Upon adoption of the new standard, the Company expects to record the cumulative effects as of January 1, 2018 which will result in an adjustment to accumulated other comprehensive income (losses) and retained earnings for unrealized gains (losses) related to equity securities owned by the Company. The Company is continuing to assess 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 Generally Accepted Accounting Principles ("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 guidance. 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 will be required for reporting periods beginning after December 15, 2018. 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 in the process of evaluating the impact of the new standard, including the evaluation of the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance, however, at this time is unable to determine the impact this standard will have on the financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 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. The provisions of ASU 2016-13 will be required for reporting periods beginning after December 15, 2019. 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 ASU 2016-13.
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 provisions of ASU 2016-15 will be required for reporting periods beginning after December 15, 2017. ASU 2016-15 will be applied using a retrospective transition method to each period presented. If it is impracticable to apply ASU
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 amends ASC 715, Compensation - Retirement Benefits, to require companies to present the service cost component of net benefit cost in the income statement line items where compensation cost is reported. Companies will present all other components of net benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The amendments of ASU 2017-07 will be required for reporting periods beginning after December 15, 2017. The amendments in ASU 2017-07 should be applied retrospectively for the income statement presentation of the service cost component and the other components of net benefit costs and prospectively, on and after the effective date, for the capitalization of the service cost component. The Company is currently assessing the future impact of this ASU.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 requires the premium on callable debt securities to be amortized to the earliest call date, contrary to current GAAP, which requires entities to amortize the premium over the contractual life of the instrument. The amendments of ASU 2017-08 do not require an accounting change for securities purchased at a discount; the discount continues to be amortized to maturity. The amendments of ASU 2017-08 will be required for reporting periods beginning after December 15, 2018. ASU 2017-08 will be applied on a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently assessing the future impact of ASU 2017-08.
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosures (in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Cash paid (received) for:
|
|
|
|
|
Interest on long-term debt and borrowings under the revolving credit facility
|
$
|
11,721
|
|
|
$
|
10,666
|
|
|
Income tax paid (refunded), net
|
(697
|
)
|
|
66
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Plant additions insurance reimbursement
|
5,056
|
|
|
—
|
|
|
Changes in accrued plant additions
|
(3,335
|
)
|
|
(5,882
|
)
|
|
Grants of restricted shares of common stock
|
540
|
|
|
653
|
|
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 March 31, 2017
|
|
Three Months Ended March 31, 2016
|
|
|
|
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
|
$
|
(23,928
|
)
|
|
$
|
28,463
|
|
|
$
|
(11,651
|
)
|
|
$
|
(7,116
|
)
|
|
$
|
(29,869
|
)
|
|
$
|
27,765
|
|
|
$
|
(11,810
|
)
|
|
$
|
(13,914
|
)
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
6,165
|
|
|
—
|
|
|
6,165
|
|
|
—
|
|
|
1,742
|
|
|
—
|
|
|
1,742
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(529
|
)
|
|
(1,756
|
)
|
|
52
|
|
|
(2,233
|
)
|
|
(387
|
)
|
|
(1,113
|
)
|
|
40
|
|
|
(1,460
|
)
|
Balance at end of period
|
$
|
(24,457
|
)
|
|
$
|
32,872
|
|
|
$
|
(11,599
|
)
|
|
$
|
(3,184
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
28,394
|
|
|
$
|
(11,770
|
)
|
|
$
|
(13,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended March 31, 2017
|
|
Twelve Months Ended March 31, 2016
|
|
|
|
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
|
$
|
(30,256
|
)
|
|
$
|
28,394
|
|
|
$
|
(11,770
|
)
|
|
$
|
(13,632
|
)
|
|
$
|
(34,628
|
)
|
|
$
|
36,782
|
|
|
$
|
(12,032
|
)
|
|
$
|
(9,878
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
7,363
|
|
|
11,327
|
|
|
—
|
|
|
18,690
|
|
|
3,777
|
|
|
(1,335
|
)
|
|
—
|
|
|
2,442
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(1,564
|
)
|
|
(6,849
|
)
|
|
171
|
|
|
(8,242
|
)
|
|
595
|
|
|
(7,053
|
)
|
|
262
|
|
|
(6,196
|
)
|
Balance at end of period
|
$
|
(24,457
|
)
|
|
$
|
32,872
|
|
|
$
|
(11,599
|
)
|
|
$
|
(3,184
|
)
|
|
$
|
(30,256
|
)
|
|
$
|
28,394
|
|
|
$
|
(11,770
|
)
|
|
$
|
(13,632
|
)
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss) for the
three and twelve
months ended
March 31, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income (Loss) Components
|
|
Three Months Ended March 31,
|
|
Twelve Months Ended March 31,
|
|
Affected Line Item in the Statement of Operations
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and post-retirement benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit
|
|
$
|
2,416
|
|
|
$
|
1,666
|
|
|
$
|
8,157
|
|
|
$
|
6,577
|
|
|
(a)
|
|
Net loss
|
|
(1,694
|
)
|
|
(1,223
|
)
|
|
(5,436
|
)
|
|
(7,595
|
)
|
|
(a)
|
|
|
|
|
722
|
|
|
443
|
|
|
2,721
|
|
|
(1,018
|
)
|
|
(a)
|
|
Income tax effect
|
|
(193
|
)
|
|
(56
|
)
|
|
(1,157
|
)
|
|
423
|
|
|
Income tax expense (benefit)
|
|
|
|
|
529
|
|
|
387
|
|
|
1,564
|
|
|
(595
|
)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on sale of securities
|
|
2,191
|
|
|
1,388
|
|
|
8,443
|
|
|
8,757
|
|
|
Investment and interest income, net
|
|
|
|
|
2,191
|
|
|
1,388
|
|
|
8,443
|
|
|
8,757
|
|
|
Income before income taxes
|
|
Income tax effect
|
|
(435
|
)
|
|
(275
|
)
|
|
(1,594
|
)
|
|
(1,704
|
)
|
|
Income tax expense (benefit)
|
|
|
|
|
1,756
|
|
|
1,113
|
|
|
6,849
|
|
|
7,053
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedge:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of loss
|
|
(130
|
)
|
|
(122
|
)
|
|
(506
|
)
|
|
(475
|
)
|
|
Interest on long-term debt and revolving credit facility
|
|
|
|
|
(130
|
)
|
|
(122
|
)
|
|
(506
|
)
|
|
(475
|
)
|
|
Income (loss) before income taxes
|
|
Income tax effect
|
|
78
|
|
|
82
|
|
|
335
|
|
|
213
|
|
|
Income tax expense
|
|
|
|
|
(52
|
)
|
|
(40
|
)
|
|
(171
|
)
|
|
(262
|
)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
2,233
|
|
|
$
|
1,460
|
|
|
$
|
8,242
|
|
|
$
|
6,196
|
|
|
|
|
|
(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 (the "2015 Texas Retail Rate Case").
On July 21, 2016, the parties to PUCT Docket No. 44941 filed the Joint Motion to Implement Uncontested Amended and Restated Stipulation and Agreement which was unopposed by the parties (the "Unopposed Settlement"). On August 25, 2016, the PUCT approved the Unopposed Settlement and issued its final order in Docket No. 44941 (the "PUCT Final Order"), as proposed. The PUCT Final Order provided for: (i) an annual non-fuel base rate increase, lower annual depreciation expense, a revised return on equity for allowance for funds used during construction ("AFUDC") purposes, and the 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 Generating Station ("Four Corners") costs, which will be collected through a surcharge terminating on
July 12, 2017
; (iii) removing the separate rate treatment for residential customers with solar systems that the Company had proposed in its August 10, 2015 filing; (iv) allowing the Company to recover
$3.1 million
in rate case expenses through a separate surcharge and (v) allowing the Company to recover revenues associated with the relate back of rates to consumption on and after
January 12, 2016
through
March 31, 2016
through a separate surcharge.
Interim rates associated with the annual non-fuel base rate increase, 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
.
For financial reporting purposes, the Company deferred any recognition of the Company's request in its 2015 Texas Retail Rate Case until it received the PUCT Final Order on
August 25, 2016
. Accordingly, it reported in the third quarter of 2016 the cumulative effect of the PUCT Final Order which related back to January 12, 2016.
2017 Texas Retail Rate Case Filing.
On February 13, 2017, the Company filed with the City of El Paso, other municipalities incorporated in the Company's Texas service territory and the PUCT in Docket No. 46831, a request for an increase in non-fuel base revenues of approximately
$42.5 million
. The Company invoked its statutory right to have its new rates relate back for consumption on and after July 18, 2017, which is the
155
th day after the filing. The difference in rates that would have been billed will be surcharged or refunded to customers after the PUCT's final order in Docket No. 46831. The PUCT has the authority to require the Company to surcharge or refund such difference over a period not to exceed
18 months
. A procedural schedule has been adopted with a hearing scheduled in late August or early September 2017. The Company cannot predict the outcome or the timing of this rate case at this time.
Energy Efficiency Cost Recovery Factor
. On May 1, 2017, the Company filed its annual application to establish its energy efficiency cost recovery factor for 2018. In addition to projected energy efficiency costs for 2018 and a true-up to prior year actual costs, the Company requested approval of a
$1.0 million
bonus for the 2016 energy efficiency program results in accordance with PUCT rules. The Company cannot predict the outcome or the timing of this matter at this time.
Fuel and Purchased Power Costs.
On November 30, 2016, the Company filed a request, which was assigned PUCT Docket No. 46610, to increase its fixed fuel factor by approximately
28.8%
to reflect increased fuel expenses primarily related to an increase in the price of natural gas used to generate power. The increase in the fixed fuel factor was effective on an interim basis January 1, 2017 and approved by the PUCT on January 10, 2017. As of
March 31, 2017
, the Company had under-recovered fuel costs in the amount of
$2.5 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 Texas fuel and purchased power expenses incurred during the period of
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
April 1, 2013
through
March 31, 2016
. On March 31, 2017, the Company requested that the hearing set for April 5, 2017 be postponed until sometime after April 26, 2017 to allow for settlement discussions. The Company and parties to the proceeding have discussed terms of a settlement in principle to resolve the issues in the case, and the Company is currently drafting a stipulation and proposed order for filing with the State Office of Administrative Hearings. The Company expects the PUCT to consider the proposed settlement in the second quarter of 2017. The Company cannot predict the outcome or the timing of this matter. As of
March 31, 2017
, Texas jurisdictional fuel and purchased power costs subject to a future Texas fuel reconciliation are approximately
$140.4 million
.
Community Solar.
On June 8, 2015, the Company filed a petition with the PUCT to initiate a community solar program that includes the construction and ownership of a
3 MW
solar photovoltaic system located at Montana Power Station. 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. The Community Solar facility is currently under construction and the Company expects completion of the solar facility and commencement of the program in the second quarter of 2017. On April 19, 2017, the Company announced that the entire
3 MW
program was fully subscribed by approximately
1,500
Texas customers.
Four Corners Generating Station.
On
February 17, 2015
, the Company and Arizona Public Service Company ("APS") entered into an asset purchase agreement (the "Purchase and Sale Agreement") providing for the sale of the Company's interest in Four Corners to APS. The sale of the Company's interest in Four Corners closed on
July 6, 2016
.
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 coal mine reclamation costs, in a rate case proceeding. On September 1, 2016, a motion by parties in the proceeding to suspend the procedural schedule in order to pursue settlement was approved. On March 3, 2017, the Company filed a Joint Motion to Implement Stipulation and Agreement, and commission Staff filed its recommendation that the Company’s disposition of its interest in Four Corners was reasonable and consistent with the public interest. A final order approving the Stipulation and Agreement was adopted by the PUCT on March 30, 2017.
At
March 31, 2017
, the regulatory asset associated with the Four Corners coal mine reclamation costs for the Company's Texas jurisdiction was approximately
$7.1 million
. Until otherwise determined, the Company will continue to recover its coal mine reclamation costs in Texas under previous orders and decisions of the PUCT. The Stipulation and Agreement also acknowledged an agreement among the parties related to the rate and accounting treatment of certain costs of Four Corners, including coal mine reclamation costs. Pursuant to the PUCT's order in PUCT Docket No. 44805, recovery of these costs will be addressed in future base rate and fuel-related proceedings. If the PUCT makes a determination that results in changes to how existing regulatory assets or previously incurred costs for Four Corners are recovered in rates, any such changes will be recognized for financial reporting purposes 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 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 a request with the NMPRC, in Case No. 15-00127-UT, for an annual increase in non-fuel base rates. On June 8, 2016, the NMPRC issued its final order in Case No. 15-00127-UT (the "NMPRC Final Order"), which approved an annual increase in non-fuel base rates of approximately
$0.6 million
, an increase of approximately
$0.5 million
in other service fees and a decrease in the Company's allowed return on equity to
9.48%
. The NMPRC Final Order concluded that all of the Company's new plant in service was reasonable and necessary and therefore would be recoverable in rates. The Company's rates were approved by the NMPRC effective July 1, 2016 and implemented at such time.
2017 New Mexico Rate Case Filing.
NMPRC Case No. 15-00109-UT required the Company to make a rate filing in New Mexico in the second quarter of 2017 using a historical test year ended December 31, 2016. On March 24, 2017, the Company, NMPRC Utility Division Staff and the New Mexico Attorney General filed a Joint Motion to Modify Filing Date Stated in Final Order requesting that the rate filing date be changed to no later than July 31, 2019, using the appropriate historical test year period. The joint request was approved by the NMPRC on April 12, 2017.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Fuel and Purchased Power Costs.
Historically, fuel and purchased power costs were recovered through base rates and a Fuel and Purchased Power Cost Adjustment Clause ("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 in Case No. 15-00127-UT, fuel and purchased power costs are no longer recovered through base rates but are recovered through the FPPCAC. The Company's request to reconcile its fuel and purchased power costs for the period January 1, 2013 through December 31, 2014 was approved in Case No. 15-00127-UT. New Mexico jurisdictional costs subject to prudence review are costs from January 1, 2015 through
March 31, 2017
that total approximately
$127.5 million
. At
March 31, 2017
, the Company had a net fuel over-recovery balance of approximately
$0.2 million
in New Mexico.
5 MW Holloman Air Force Base ("HAFB") Facility CCN
. On October 7, 2015, in NMPRC Case No. 15-00185-UT, the NMPRC issued a final order approving a CCN for a
5 MW
solar power generation facility located on HAFB in the Company's service territory in New Mexico. The Company and HAFB negotiated a special retail contract, which includes power sales agreement for the facility, to replace the existing load retention agreement which was approved by final order issued October 5, 2016 in NMPRC Case No. 16-00224-UT. Construction of the solar generation facility is expected to be completed in the fourth quarter of 2017 or early 2018.
New Mexico Efficient Use of Energy Recovery Factor.
On
July 1, 2016
, the Company filed its annual application requesting approval of its 2017 Energy Efficiency and Load Management Plan and to establish energy efficiency cost recovery factors for 2017. In addition to projected energy efficiency costs for 2017, the Company requested approval of a
$0.4 million
incentive for 2017 energy efficiency programs in accordance with NMPRC rules. This case was assigned Case No. 16-00185-UT. On
February 22, 2017
, the NMPRC issued a Final Order approving the Company’s 2017 Energy Efficiency and Load Management Plan and authorizing recovery in 2017 of a base incentive of
$0.4 million
. The Company’s energy efficiency cost recovery factors were approved and effective in customer bills beginning on March 1, 2017. In addition, on
July 1, 2016
, the Company filed its 2015 Annual Report for Energy Efficiency Programs, which included an incentive for verified 2015 program performance of
$0.3 million
, which was approved in Case No. 13-00176-UT. The Company recorded the
$0.3 million
approved incentive in operating revenues in the first quarter of 2017.
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.
Federal Regulatory Matters
The Company has obtained required approvals for rates and tariffs, securities transactions and other approvals as required by the FERC.
D. Palo Verde
Decommissioning
. Pursuant to the ANPP Participation Agreement and federal law, the Company funds its share of the estimated costs to decommission Palo Verde Nuclear Generating Station ("Palo Verde") Units 1, 2 and 3, including the Common Facilities, through the term of their respective operating licenses and is required to maintain a minimum accumulation and funding level in its decommissioning account at the end of each annual reporting period during the life of the plant. The Company has established external trusts with an independent trustee, which enables the Company to record a current deduction for federal income tax purposes for most of the amounts funded. At March 31, 2017, the Company’s decommissioning trust fund had a balance of
$265.9 million
, which is above its minimum funding level. The Company monitors the status of its decommissioning funds and adjusts its deposits, if necessary.
Decommissioning costs are estimated every
three years
based upon engineering cost studies performed by outside engineers retained by APS. In April 2017, the Palo Verde Participants approved the 2016 Palo Verde decommissioning study (the “2016 Study”). The 2016 Study estimated that the Company must fund approximately
$432.8 million
(stated in 2016 dollars) to cover its share of decommissioning costs which was an increase in decommissioning costs of
$52.1 million
(stated in 2016 dollars) from the 2013 Palo Verde decommissioning study. The effect of this change increased the ARO by
$3.1 million
, which was recorded in the first quarter of 2017, and will increase annual expenses starting in April 2017. Although the 2016 Study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to uncertainty. As provided in the ANPP Participation Agreement, the participants are required to conduct a new decommissioning study every
three years
. While the
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Company attempts to seek amounts in rates to meet its decommissioning obligations, it is not able to conclude given the evidence available to it now that it is probable these costs will continue to be collected over the period until decommissioning begins in 2044. The Company is ultimately responsible for these costs and its future actions combined with future decisions from regulators will determine how successful the Company is in this effort.
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
October 31, 2014
, APS, acting on behalf of itself and the Palo Verde Participants, submitted to the government a 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. After June 2015, 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. In
March 2016
, the Company received its share of this claim of approximately
$1.9 million
, of which
$1.6 million
was credited to customers through the applicable fuel adjustment clauses.
On
October 31, 2016
, APS filed an
$11.3 million
claim for the period
July 1, 2015
through
June 30, 2016
. On February 1, 2017, the DOE notified APS of the approval of the claim. On
March 10, 2017
, the Company received approximately
$1.8 million
, representing its share of the award, of which
$1.4 million
was 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):
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Three months ended March 31,
|
|
$
|
21,608
|
|
|
$
|
22,343
|
|
Twelve months ended March 31,
|
|
96,179
|
|
|
98,134
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
E. Common Stock
Dividends.
The Company paid
$12.6 million
and
$11.9 million
in quarterly cash dividends during the
three months ended March 31, 2017
and
2016
, respectively. The Company paid a total of
$50.3 million
and
$47.7 million
in quarterly cash dividends during the twelve months ended
March 31, 2017
and
2016
, 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 March 31,
|
|
Twelve Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic number of common shares outstanding
|
40,387,235
|
|
|
40,325,324
|
|
|
40,366,024
|
|
|
40,295,316
|
|
Dilutive effect of unvested performance awards
|
—
|
|
|
—
|
|
|
69,665
|
|
|
36,824
|
|
Diluted number of common shares outstanding
|
40,387,235
|
|
|
40,325,324
|
|
|
40,435,689
|
|
|
40,332,140
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(3,989
|
)
|
|
$
|
(5,808
|
)
|
|
$
|
98,587
|
|
|
$
|
72,652
|
|
Income allocated to participating restricted stock
|
(45
|
)
|
|
(32
|
)
|
|
(349
|
)
|
|
(209
|
)
|
Net income (loss) available to common shareholders
|
$
|
(4,034
|
)
|
|
$
|
(5,840
|
)
|
|
$
|
98,238
|
|
|
$
|
72,443
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(3,989
|
)
|
|
$
|
(5,808
|
)
|
|
$
|
98,587
|
|
|
$
|
72,652
|
|
Income reallocated to participating restricted stock
|
(45
|
)
|
|
(32
|
)
|
|
(349
|
)
|
|
(209
|
)
|
Net income (loss) available to common shareholders
|
$
|
(4,034
|
)
|
|
$
|
(5,840
|
)
|
|
$
|
98,238
|
|
|
$
|
72,443
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
0.31
|
|
|
$
|
0.295
|
|
|
$
|
1.24
|
|
|
$
|
1.18
|
|
Undistributed earnings (losses)
|
(0.41
|
)
|
|
(0.435
|
)
|
|
1.19
|
|
|
0.62
|
|
Basic net income (loss) per common share
|
$
|
(0.10
|
)
|
|
$
|
(0.140
|
)
|
|
$
|
2.43
|
|
|
$
|
1.80
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
0.31
|
|
|
$
|
0.295
|
|
|
$
|
1.24
|
|
|
$
|
1.18
|
|
Undistributed earnings (losses)
|
(0.41
|
)
|
|
(0.435
|
)
|
|
1.19
|
|
|
0.62
|
|
Diluted net income (loss) per common share
|
$
|
(0.10
|
)
|
|
$
|
(0.140
|
)
|
|
$
|
2.43
|
|
|
$
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Restricted stock awards
|
78,025
|
|
|
59,462
|
|
|
58,344
|
|
|
54,192
|
|
Performance shares (a)
|
—
|
|
|
62,995
|
|
|
47,246
|
|
|
49,183
|
|
|
|
(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, Arizona and New Mexico jurisdictions for years prior to
2012
. The Company is currently under audit in Texas for tax years
2007
through
2011
.
For the
three months ended March 31, 2017
and
2016
, the Company’s effective tax rate was
36.5%
and
35.2%
, respectively. For the twelve months ended
March 31, 2017
and
2016
, the Company's effective tax rate was
35.7%
and
29.7%
, 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 PUCT's and NMPRC's most recent final orders. 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
$1.0 million
and
$5.1 million
for the
three and twelve months ended
March 31, 2017
, respectively.
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
2016
Form 10-K. In addition, see Notes C and D above and Notes C and E of the Notes to Financial Statements in the
2016
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
2016
Form 10-K.
Environmental Matters
General.
The Company is subject to extensive laws, regulations and permit requirements with respect to air and greenhouse gas ("GHG") 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.
On March 28, 2017 the Company entered into a Compliance Agreement (the “Compliance Agreement”) with the Texas Commission on Environmental Quality under the Texas Environmental, Health and Safety Audit Privilege Act to address certain water and waste compliance issues associated with the integrity of the synthetic liner of the evaporation pond at the Company’s Newman Generating Station. The Company's action plan will be implemented over the
three
year period of the Compliance Agreement starting in the second quarter of 2017. The Company is currently evaluating the cost of performing its obligations under the Compliance Agreement.
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 2016 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 and twelve months ended
March 31, 2017
and
2016
is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
2,270
|
|
|
$
|
1,905
|
|
|
$
|
8,366
|
|
|
$
|
8,597
|
|
Interest cost
|
3,248
|
|
|
3,265
|
|
|
13,022
|
|
|
14,135
|
|
Expected return on plan assets
|
(4,808
|
)
|
|
(4,712
|
)
|
|
(18,975
|
)
|
|
(19,560
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Net loss
|
2,089
|
|
|
1,888
|
|
|
7,540
|
|
|
9,785
|
|
Prior service benefit
|
(878
|
)
|
|
(878
|
)
|
|
(3,506
|
)
|
|
(3,496
|
)
|
Net periodic benefit cost
|
$
|
1,921
|
|
|
$
|
1,468
|
|
|
$
|
6,447
|
|
|
$
|
9,461
|
|
During the
three months ended
March 31, 2017
, the Company contributed
$3.0 million
of its projected
$10.0 million
2017
annual contribution to its retirement plans.
Other Postretirement Benefits
The net periodic benefit recognized for the
three and twelve months ended
March 31, 2017
and
2016
is made up of the components listed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Components of net periodic benefit:
|
|
|
|
|
|
|
|
Service cost
|
$
|
588
|
|
|
$
|
715
|
|
|
$
|
2,642
|
|
|
$
|
3,294
|
|
Interest cost
|
678
|
|
|
873
|
|
|
2,972
|
|
|
3,883
|
|
Expected return on plan assets
|
(470
|
)
|
|
(460
|
)
|
|
(1,845
|
)
|
|
(2,005
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service benefit
|
(1,538
|
)
|
|
(788
|
)
|
|
(4,651
|
)
|
|
(3,081
|
)
|
Net gain
|
(395
|
)
|
|
(665
|
)
|
|
(2,104
|
)
|
|
(2,190
|
)
|
Net periodic benefit
|
$
|
(1,137
|
)
|
|
$
|
(325
|
)
|
|
$
|
(2,986
|
)
|
|
$
|
(99
|
)
|
During the
three months ended
March 31, 2017
, the Company contributed
$0.1 million
of its projected
$1.5 million
2017
annual contribution to its other postretirement benefits plan.
4J. 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 Revolving Credit Facility ("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.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
Pollution Control Bonds
|
$
|
190,844
|
|
|
$
|
204,599
|
|
|
$
|
190,775
|
|
|
$
|
206,818
|
|
Senior Notes
|
993,170
|
|
|
1,126,625
|
|
|
993,086
|
|
|
1,112,285
|
|
RGRT Senior Notes (1)
|
94,822
|
|
|
98,555
|
|
|
94,795
|
|
|
98,855
|
|
RCF (1)
|
134,178
|
|
|
134,178
|
|
|
81,574
|
|
|
81,574
|
|
Total
|
$
|
1,413,014
|
|
|
$
|
1,563,957
|
|
|
$
|
1,360,230
|
|
|
$
|
1,499,532
|
|
_______________
|
|
(1)
|
Nuclear fuel financing, as of
March 31, 2017
and
December 31, 2016
, is funded through the
$95 million
Rio Grande Resources Trust ("RGRT") Senior Notes and
$40.2 million
and
$37.6 million
, respectively under the RCF. As of
March 31, 2017
,
$94.0 million
was outstanding under the RCF for working capital or general corporate purposes. As of
December 31, 2016
,
$44.0 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
$265.9 million
and
$255.7 million
at
March 31, 2017
and
December 31, 2016
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
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
|
$
|
11,142
|
|
|
$
|
(249
|
)
|
|
$
|
424
|
|
|
$
|
(23
|
)
|
|
$
|
11,566
|
|
|
$
|
(272
|
)
|
U.S. Government Bonds
|
32,621
|
|
|
(739
|
)
|
|
9,876
|
|
|
(570
|
)
|
|
42,497
|
|
|
(1,309
|
)
|
Municipal Obligations
|
9,152
|
|
|
(298
|
)
|
|
4,413
|
|
|
(385
|
)
|
|
13,565
|
|
|
(683
|
)
|
Corporate Obligations
|
9,665
|
|
|
(131
|
)
|
|
2,491
|
|
|
(208
|
)
|
|
12,156
|
|
|
(339
|
)
|
Total Debt Securities
|
62,580
|
|
|
(1,417
|
)
|
|
17,204
|
|
|
(1,186
|
)
|
|
79,784
|
|
|
(2,603
|
)
|
Common Stock
|
541
|
|
|
(53
|
)
|
|
—
|
|
|
—
|
|
|
541
|
|
|
(53
|
)
|
Total Temporarily Impaired Securities
|
$
|
63,121
|
|
|
$
|
(1,470
|
)
|
|
$
|
17,204
|
|
|
$
|
(1,186
|
)
|
|
$
|
80,325
|
|
|
$
|
(2,656
|
)
|
_________________
|
|
(1)
|
Includes
139
securities.
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
11,582
|
|
|
$
|
(239
|
)
|
|
$
|
436
|
|
|
$
|
(22
|
)
|
|
$
|
12,018
|
|
|
$
|
(261
|
)
|
U.S. Government Bonds
|
31,655
|
|
|
(762
|
)
|
|
17,976
|
|
|
(835
|
)
|
|
49,631
|
|
|
(1,597
|
)
|
Municipal Obligations
|
9,596
|
|
|
(394
|
)
|
|
4,067
|
|
|
(372
|
)
|
|
13,663
|
|
|
(766
|
)
|
Corporate Obligations
|
7,971
|
|
|
(172
|
)
|
|
2,092
|
|
|
(172
|
)
|
|
10,063
|
|
|
(344
|
)
|
Total Debt Securities
|
60,804
|
|
|
(1,567
|
)
|
|
24,571
|
|
|
(1,401
|
)
|
|
85,375
|
|
|
(2,968
|
)
|
Common Stock
|
2,760
|
|
|
(167
|
)
|
|
—
|
|
|
—
|
|
|
2,760
|
|
|
(167
|
)
|
Institutional Equity Funds-International Equity
|
22,945
|
|
|
(110
|
)
|
|
—
|
|
|
—
|
|
|
22,945
|
|
|
(110
|
)
|
Total Temporarily Impaired Securities
|
$
|
86,509
|
|
|
$
|
(1,844
|
)
|
|
$
|
24,571
|
|
|
$
|
(1,401
|
)
|
|
$
|
111,080
|
|
|
$
|
(3,245
|
)
|
_________________
|
|
(2)
|
Includes
152
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 and twelve months ended March 31, 2017
and
2016
, the Company recognized other than temporary impairment losses on its available-for-sale securities as follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Unrealized holding losses included in pre-tax income
|
$
|
—
|
|
|
$
|
(156
|
)
|
|
$
|
(196
|
)
|
|
$
|
(494
|
)
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Fair
Value
|
|
Unrealized
Gains
|
|
Fair
Value
|
|
Unrealized
Gains
|
Description of Securities:
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
6,991
|
|
|
$
|
276
|
|
|
$
|
7,430
|
|
|
$
|
319
|
|
U.S. Government Bonds
|
15,811
|
|
|
198
|
|
|
12,237
|
|
|
138
|
|
Municipal Obligations
|
4,086
|
|
|
144
|
|
|
2,481
|
|
|
144
|
|
Corporate Obligations
|
14,393
|
|
|
710
|
|
|
12,350
|
|
|
655
|
|
Total Debt Securities
|
41,281
|
|
|
1,328
|
|
|
34,498
|
|
|
1,256
|
|
Common Stock
|
62,487
|
|
|
34,868
|
|
|
61,884
|
|
|
34,066
|
|
Equity Mutual Funds
|
50,225
|
|
|
5,690
|
|
|
42,244
|
|
|
3,345
|
|
Institutional Funds - International Equity
|
24,737
|
|
|
1,722
|
|
|
—
|
|
|
—
|
|
Cash and Cash Equivalents
|
6,802
|
|
|
—
|
|
|
6,002
|
|
|
—
|
|
Total
|
$
|
185,532
|
|
|
$
|
43,608
|
|
|
$
|
144,628
|
|
|
$
|
38,667
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The Company's marketable securities include investments in mortgage backed securities, municipal, corporate and federal debt obligations. The contractual year for maturity of these available-for-sale securities as of
March 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2017
|
|
2018
through
2021
|
|
2022 through 2026
|
|
2027 and Beyond
|
Municipal Debt Obligations
|
$
|
17,651
|
|
|
$
|
804
|
|
|
$
|
6,366
|
|
|
$
|
9,203
|
|
|
$
|
1,278
|
|
Corporate Debt Obligations
|
26,549
|
|
|
—
|
|
|
10,110
|
|
|
7,511
|
|
|
8,928
|
|
U.S. Government Bonds
|
58,308
|
|
|
5,928
|
|
|
27,123
|
|
|
14,834
|
|
|
10,423
|
|
Federal Agency Mortgage Backed Securities
|
18,557
|
|
|
—
|
|
|
6
|
|
|
356
|
|
|
18,195
|
|
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 and twelve months ended March 31, 2017 and 2016 and the related effects on pre-tax income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Proceeds from sales or maturities of available-for-sale securities
|
$
|
26,055
|
|
|
$
|
24,078
|
|
|
$
|
93,245
|
|
|
$
|
102,003
|
|
Gross realized gains included in pre-tax income
|
$
|
2,587
|
|
|
$
|
1,832
|
|
|
$
|
9,968
|
|
|
$
|
10,429
|
|
Gross realized losses included in pre-tax income
|
(396
|
)
|
|
(288
|
)
|
|
(1,329
|
)
|
|
(1,178
|
)
|
Gross unrealized losses included in pre-tax income
|
—
|
|
|
(156
|
)
|
|
(196
|
)
|
|
(494
|
)
|
Net gains included in pre-tax income
|
$
|
2,191
|
|
|
$
|
1,388
|
|
|
$
|
8,443
|
|
|
$
|
8,757
|
|
Net unrealized holding gains (losses) included in accumulated other comprehensive income
|
$
|
7,721
|
|
|
$
|
2,190
|
|
|
$
|
13,975
|
|
|
$
|
(1,730
|
)
|
Net gains reclassified from accumulated other comprehensive income
|
(2,191
|
)
|
|
(1,388
|
)
|
|
(8,443
|
)
|
|
(8,757
|
)
|
Net gains (losses) in other comprehensive
income
|
$
|
5,530
|
|
|
$
|
802
|
|
|
$
|
5,532
|
|
|
$
|
(10,487
|
)
|
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 Net Asset Value ("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 concluded that the NAV used for determining the fair value of the Institutional Funds- International Equity investments have readily determinable fair values. Accordingly, such fund values have been re-categorized from Level 2 to Level 1 hierarchy.
|
|
|
•
|
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
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
March 31, 2017
and
December 31, 2016
, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
Fair Value as of March 31, 2017
|
|
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
|
$
|
1,628
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,628
|
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Government Bonds
|
$
|
58,308
|
|
|
$
|
58,308
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal Agency Mortgage Backed Securities
|
18,557
|
|
|
—
|
|
|
18,557
|
|
|
—
|
|
Municipal Obligations
|
17,651
|
|
|
—
|
|
|
17,651
|
|
|
—
|
|
Corporate Obligations
|
26,549
|
|
|
—
|
|
|
26,549
|
|
|
—
|
|
Subtotal, Debt Securities
|
121,065
|
|
|
58,308
|
|
|
62,757
|
|
|
—
|
|
Common Stock
|
63,028
|
|
|
63,028
|
|
|
—
|
|
|
—
|
|
Equity Mutual Funds
|
50,225
|
|
|
50,225
|
|
|
—
|
|
|
—
|
|
Institutional Funds-International Equity
|
24,737
|
|
|
24,737
|
|
|
—
|
|
|
—
|
|
Cash and Cash Equivalents
|
6,802
|
|
|
6,802
|
|
|
—
|
|
|
—
|
|
Total Available for Sale
|
$
|
265,857
|
|
|
$
|
203,100
|
|
|
$
|
62,757
|
|
|
$
|
—
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
Fair Value as of December 31, 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
|
$
|
1,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,421
|
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Government Bonds
|
$
|
61,868
|
|
|
$
|
61,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal Agency Mortgage Backed Securities
|
19,448
|
|
|
—
|
|
|
19,448
|
|
|
—
|
|
Municipal Obligations
|
16,144
|
|
|
—
|
|
|
16,144
|
|
|
—
|
|
Corporate Obligations
|
22,413
|
|
|
—
|
|
|
22,413
|
|
|
—
|
|
Subtotal, Debt Securities
|
119,873
|
|
|
61,868
|
|
|
58,005
|
|
|
—
|
|
Common Stock
|
64,644
|
|
|
64,644
|
|
|
—
|
|
|
—
|
|
Equity Mutual Funds
|
42,244
|
|
|
42,244
|
|
|
—
|
|
|
—
|
|
Institutional Funds-International Equity
|
22,945
|
|
|
22,945
|
|
|
—
|
|
|
—
|
|
Cash and Cash Equivalents
|
6,002
|
|
|
6,002
|
|
|
—
|
|
|
—
|
|
Total Available for Sale
|
$
|
255,708
|
|
|
$
|
197,703
|
|
|
$
|
58,005
|
|
|
$
|
—
|
|
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 and twelve
month periods ended
March 31, 2017
and
2016
. There were
no
purchases, sales, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the
three and twelve months ended
March 31, 2017
and
2016
.