El Paso Electric Announces Second Quarter 2019 Financial Results

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

Overview

Generally Accepted Accounting Principles (“GAAP”) Financial Measures

  • For the second quarter of 2019, El Paso Electric Company (“EE” or the “Company”) reported net income of $26.1 million, or $0.64 basic and diluted earnings per share. In the second quarter of 2018, EE reported net income of $33.3 million, or $0.82 basic and diluted earnings per share.
  • For the six months ended June 30, 2019, EE reported net income of $32.2 million, or $0.79 basic and diluted earnings per share. Net income for the six months ended June 30, 2018, was $26.3 million, or $0.65 basic and diluted earnings per share.

Non-GAAP Financial Measures

  • For the second quarter of 2019, EE reported adjusted net income of $21.9 million, or $0.54 adjusted basic earnings per share. In the second quarter of 2018, EE reported adjusted net income of $30.8 million, or $0.76 adjusted basic earnings per share. Adjusted net income and adjusted basic earnings per share, both non-GAAP financial measures, exclude the impact of changes in the fair value of equity securities and realized gains (losses) from the sale of both equity and fixed income securities.
  • For the six months ended June 30, 2019, EE reported adjusted net income of $15.2 million, or $0.37 adjusted basic earnings per share. In the six months ended June 30, 2018, EE reported adjusted net income of $25.9 million, or $0.64 adjusted basic earnings per share.

Refer to “Use of Non-GAAP Financial Measures” of this news release for a reconciliation of Adjusted Net Income and Adjusted Basic Earnings Per Share (non-GAAP financial measures) to Net Income and Basic Earnings Per Share, the most directly comparable GAAP financial measures, respectively.

“During this difficult time, we want to extend our condolences to everyone affected by the recent tragedy in our community,” said Adrian J. Rodriguez, Interim Chief Executive Officer. “We are working with our community partners to provide support to victim relief efforts. El Paso is a loving and welcoming community, and our reaction to tragedies like this is what defines us. We will continue to remain strong, open and giving. I also want to thank everyone for the overwhelming, heartfelt outreach and condolences that we have received in the last few days.”

Earnings Summary

The table and explanations below are presented on a GAAP basis and indicate the major factors affecting net income during the three months and six months ended June 30, 2019, relative to net income during the three months and six months ended June 30, 2018 (in thousands except Basic EPS data):

 

 

Three Months Ended

 

Six Months Ended

 

 

Pre-Tax Effect

 

After-Tax Effect

 

Basic EPS

 

Pre-Tax Effect

 

After-Tax Effect

 

Basic EPS

June 30, 2018

 

 

$

33,295

 

 

$

0.82

 

 

 

 

$

26,329

 

 

$

0.65

 

Changes in:

 

 

 

 

 

 

 

 

 

 

 

 

Retail non-fuel base revenues

(12,389

)

 

(9,787

)

 

(0.24

)

 

(11,273

)

 

(8,905

)

 

(0.22

)

 

Strategic transaction costs

(5,675

)

 

(4,483

)

 

(0.11

)

 

(5,675

)

 

(4,483

)

 

(0.11

)

 

O&M expenses at fossil-fuel generating plants

4,061

 

 

3,208

 

 

0.08

 

 

3,535

 

 

2,792

 

 

0.07

 

 

Investment and interest income, NDT

2,204

 

 

1,770

 

 

0.04

 

 

20,812

 

 

16,608

 

 

0.40

 

 

Other

 

 

2,123

 

 

0.05

 

 

 

 

(126

)

 

 

June 30, 2019

 

 

$

26,126

 

 

$

0.64

 

 

 

 

$

32,215

 

 

$

0.79

 

Second Quarter of 2019

Net income for the three months ended June 30, 2019, when compared to the three months ended June 30, 2018, was negatively affected by (presented on a pre-tax basis):

  • Decreased retail non-fuel base revenues primarily due to decreased revenues from (i) residential customers of $9.5 million caused by a 13.9% decrease in kilowatt-hour (“kWh”) sales, (ii) small commercial and industrial customers of $1.9 million caused by a 5.6% decrease in kWh sales, and (iii) sales to public authorities of $0.9 million caused by a 7.1% decrease in kWh sales. The decreases in kWh sales primarily resulted from overall milder weather, partially offset by customer growth of 1.6% in the three months ended June 30, 2019, compared to the three months ended June 30, 2018. Cooling degree days decreased 27.4% in the three months ended June 30, 2019, when compared to the three months ended June 30, 2018, and were 11.7% below the 10-year average. Non-fuel base revenues and kWh sales for the three months ended June 30, 2019, are provided by customer class under the Sales and Revenues Statistics table of this news release.
  • Increased strategic transaction costs of $5.7 million incurred in connection with the proposed merger between the Company and an affiliate of the Infrastructure Investments Fund, an investment vehicle advised by J.P. Morgan Investment Management Inc. (“IIF”). Refer to “Agreement and Plan of Merger” of this news release for further details.

Net income for the three months ended June 30, 2019, when compared to the three months ended June 30, 2018, was positively affected by (presented on a pre-tax basis):

  • Decreased operations and maintenance (“O&M”) expenses related to the Company’s fossil-fuel generating plants primarily due to decreased outage costs at Newman Power Station (“Newman”) Units 1 & 2 and Rio Grande Power Station (“Rio Grande”) Unit 8, and decreased maintenance costs at Newman.
  • Increased investment and interest income, NDT primarily due to net realized and unrealized gains of $5.2 million for the three months ended June 30, 2019, compared to net realized and unrealized gains of $3.1 million for the three months ended June 30, 2018, on securities held in the Company’s Palo Verde nuclear decommissioning trust funds (“NDT”). Refer to “Use of Non-GAAP Financial Measures” for further details.

First Six Months of 2019

Net income for the six months ended June 30, 2019, when compared to the six months ended June 30, 2018, was positively affected by (presented on a pre-tax basis):

  • Increased investment and interest income, NDT primarily due to net realized and unrealized gains of $21.2 million for the six months ended June 30, 2019, compared to net realized and unrealized gains of $0.6 million for the six months ended June 30, 2018, on securities held in the NDT. Refer to “Use of Non-GAAP Financial Measures” for further details.
  • Decreased O&M expenses related to the Company’s fossil-fuel generating plants primarily due to decreased outage costs at Rio Grande Unit 8 and Newman Units 1 & 2, and decreased maintenance at Newman. These decreases were partially offset by increased outage costs at Newman Unit 4 and increased maintenance costs at Montana Power Station.

Net income for the six months ended June 30, 2019, when compared to the six months ended June 30, 2018, was negatively affected by (presented on a pre-tax basis):

  • Decreased retail non-fuel base revenues primarily due to decreased revenues from (i) residential customers of $8.4 million caused by a 7.0% decrease in kWh sales, (ii) small commercial and industrial customers of $2.2 million caused by a 3.4% decrease in kWh sales, and (iii) sales to public authorities of $0.8 million caused by a 3.6% decrease in kWh sales. The decreases in kWh sales primarily resulted from overall milder weather, partially offset by customer growth of 1.6% in the six months ended June 30, 2019, compared to the six months ended June 30, 2018. Cooling degree days decreased 26.7% in the six months ended June 30, 2019, when compared to the six months ended June 30, 2018, and were 11.3% below the 10-year average. Non-fuel base revenues and kWh sales for the six months ended June 30, 2019, are provided by customer class on the Sales and Revenues Statistics table of this news release.
  • Increased strategic transaction costs of $5.7 million incurred in connection with the proposed merger between the Company and IIF. Refer to “Agreement and Plan of Merger” of this news release for further details.

Agreement and Plan of Merger

On June 1, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Sun Jupiter Holdings LLC, a Delaware limited liability company (“Parent”), and Sun Merger Sub Inc., a Texas corporation and wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement, on and subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of IIF.

On and subject to the terms and conditions set forth in the Merger Agreement, upon closing of the Merger, each share of common stock of the Company shall be cancelled and converted into the right to receive $68.25 in cash, without interest (the “Merger Consideration”).

Consummation of the Merger is subject to various conditions, including: (1) approval of the shareholders of the Company, (2) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period, (3) receipt of all required regulatory and statutory approvals without the imposition of a Burdensome Condition, (4) absence of any law or order prohibiting the consummation of the Merger and (5) other customary closing conditions, including (a) subject to materiality qualifiers, the accuracy of each party’s representations and warranties, (b) each party’s compliance in all material respects with its obligations and covenants under the Merger Agreement and (c) the absence of a material adverse effect with respect to the Company.

The Merger Agreement contains certain termination rights for both the Company and Parent, including if the Merger is not consummated by June 1, 2020 (subject to extension for an additional three months if all of the conditions to closing, other than the conditions related to obtaining regulatory approvals, have been satisfied). The Merger Agreement also provides for certain termination rights for each of the Company and Parent, and provides that, upon termination of the Merger Agreement under certain specified circumstances, Parent would be required to pay a termination fee of $170 million to the Company, and under other specified circumstances, the Company would be required to pay Parent a termination fee of $85 million.

The Company expects that the Company and Parent will submit their filings relating to the Merger with the Federal Energy Regulatory Commission (“FERC”), the U.S. Nuclear Regulatory Commission, the Federal Communications Commission, the Public Utility Commission of Texas (“PUCT”) and the New Mexico Public Regulation Commission (“NMPRC”) in August 2019. The Company also expects that the Company and Parent will submit their filings with the Antitrust Division of the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Act in August 2019. Under the Merger Agreement, the consent to the Merger by the City of El Paso under its franchise agreement with the Company is a condition to the closing of the Merger. Under the franchise agreement, if the City of El Paso does not grant its consent to the Merger, the franchise agreement would terminate upon the closing of the Merger. On August 2, 2019, the Company filed a definitive proxy statement with the SEC in connection with the Merger. A special shareholder meeting to vote on matters relating to the Merger is scheduled to be held on September 19, 2019. Subject to receipt of remaining approvals and satisfaction of the other closing conditions, the Company anticipates that the closing of the Merger will occur in the first half of 2020.

For more information regarding the terms of the Merger, including a copy of the Merger Agreement, see the Company’s Current Report on Form 8-K filed with the SEC on June 3, 2019 and its definitive proxy statement relating to the special meeting of shareholders filed with the U.S. Securities and Exchange Commission (the “SEC”) on August 2, 2019.

Company Leadership Changes

On June 25, 2019, Mary E. Kipp, President and Chief Executive Officer of the Company, informed the Board that she was resigning from her positions at the Company and as a member of the Board effective August 1, 2019 to become the President of Puget Sound Energy, Inc. and Puget Energy, Inc. On June 28, 2019, effective upon Ms. Kipp’s resignation, the Board appointed (i) Mr. Adrian J. Rodriguez, then Senior Vice President, General Counsel and Assistant Secretary of the Company, to the role of interim Chief Executive Officer, and (ii) Ms. Elaina L. Ball, then Senior Vice President and Chief Administrative Officer of the Company, to the role of Senior Vice President and Interim Chief Operating Officer of the Company. On July 25, 2019, in accordance with Article III, Section 3 of the Amended and Restated Bylaws of the Company, the Board of Directors of the Company appointed Mr. Rodriguez to fill the vacancy on the Board, effective August 1, 2019, created by the resignation of Ms. Kipp, effective August 1, 2019. Mr. Rodriguez will initially serve as a Class I Director of the Company, filling the unexpired term of Ms. Kipp.

For more information, see El Paso Electric Company’s Current Report on Form 8-K filed with the SEC on July 1, 2019.

Regulatory Matters

Texas Regulatory Matters

Transmission Cost Recovery Factor. On January 25, 2019, the Company filed an application with the PUCT to establish its Transmission Cost Recovery Factor (“TCRF”), which was assigned PUCT Docket No. 49148 (the “2019 TCRF rate filing”). The 2019 TCRF rate filing is designed to recover a requested $8.2 million of Texas jurisdictional transmission revenue requirement that is not currently being recovered in the Company’s Texas base rates for transmission-related investments placed in service from October 1, 2016, through September 30, 2018, net of retirements. On April 30, 2019, the Company revised the request to $8.1 million to reflect a reclassified item that would likely be included in a future Distribution Cost Recovery Factor (“DCRF”) filing. The Administrative Law Judges ordered a suspension of the hearing date to allow the parties to explore settlement options. On May 13, 2019, the parties filed a settlement status report and will continue to file updates as necessary. On June 26, 2019, abatement of the schedule was lifted and the parties were required to submit proposed hearing dates, which are expected to begin in August 2019, if a settlement is unsuccessful. In the meantime, settlement discussions between the parties are continuing. The Company cannot predict the outcome of this filing at this time. Pursuant to the procedural order issued on February 20, 2019, the Company’s existing TCRF rate was approved on an interim basis and became effective July 30, 2019, subject to any refund or surcharge to the extent the PUCT’s final order establishes a TCRF rate that differs from the interim rate.

Distribution Cost Recovery Factor. On March 28, 2019, the Company filed an application with the PUCT and each of its Texas municipalities to establish its DCRF, which was assigned PUCT Docket No. 49395 (the “2019 DCRF rate filing”). The 2019 DCRF rate filing is designed to recover a requested $7.9 million of Texas jurisdictional distribution revenue requirement that is not currently being recovered in the Company’s Texas base rates for distribution-related investments placed in service from October 1, 2016, through December 31, 2018, net of retirements. On June 11, 2019, hearings scheduled for June 13, 2019, were cancelled at the request of all parties to explore settlement options. The briefing in the case is complete, and settlement discussions between the parties are continuing. The Company cannot predict the outcome of this filing at this time.

New Mexico Regulatory Matters

The Company was required to file its next New Mexico base rate case no later than July 31, 2019. On July 10, 2019, the NMPRC issued an order approving a joint request by the Company, NMPRC Staff, and the New Mexico Attorney General to delay filing of the Company’s next base rate case until after the conclusion of a proceeding addressing the Merger. The Company and IIF expect to file their Joint Application for regulatory approvals with the NMPRC requesting approval of the Merger in August 2019. The NMPRC order requires the Company to file its next rate case application within three months of the conclusion of the proceeding addressing the Merger. The Company cannot predict the outcome of this filing at this time.

Use of Non-GAAP Financial Measures

As required by ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, changes in the fair value of equity securities are recognized in the Company’s Statements of Operations. This standard added the potential for significant volatility to the Company’s reported results of operations as changes in the fair value of equity securities may occur. Furthermore, the equity investments included in the NDT are significant and are expected to increase significantly during the remaining life (estimated to be 26 to 29 years) of the Palo Verde Generating Station (“Palo Verde”). Accordingly, the Company has provided the following non-GAAP financial measures to exclude the impact of changes in fair value of equity securities and realized gains (losses) from the sale of both equity and fixed income securities. Reconciliations of both non-GAAP financial measures to the most directly comparable financial information presented in accordance with GAAP are presented in the table below. Non-GAAP adjusted net income is reconciled to GAAP net income, and non-GAAP adjusted basic earnings per share is reconciled to GAAP basic earnings per share.

 

Three Months Ended

 

June 30,

 

2019 (a)

 

2018

 

(In thousands except for per share data)

Net income (GAAP)

$

26,126

 

 

$

33,295

 

Adjusting items before income tax effects

 

 

 

Unrealized gains, net

(5,209

)

 

(983

)

Realized gains, net

(17

)

 

(2,119

)

Total adjustments before income tax effects

(5,226

)

 

(3,102

)

Income taxes on above adjustments

1,045

 

 

621

 

Adjusting items, net of income taxes

(4,181

)

 

(2,481

)

Adjusted net income (non-GAAP)

$

21,945

 

 

$

30,814

 

 

 

 

 

Basic earnings per share (GAAP)

$

0.64

 

 

$

0.82

 

Adjusted basic earnings per share (non-GAAP)

$

0.54

 

 

$

0.76

 

(a) Net income (GAAP) and Adjusted net income (non-GAAP) include a pre-tax charge of $5.7 million or $0.11 per share, after-tax, of strategic transaction costs.

 

Six Months Ended

 

June 30,

 

2019 (a)

 

2018

 

(In thousands except for per share data)

Net income (GAAP)

$

32,215

 

 

$

26,329

 

Adjusting items before income tax effects

 

 

 

Unrealized (gains) losses, net

(21,899

)

 

2,798

 

Realized (gains) losses, net

684

 

 

(3,391

)

Total adjustments before income tax effects

(21,215

)

 

(593

)

Income taxes on above adjustments

4,243

 

 

119

 

Adjusting items, net of income taxes

(16,972

)

 

(474

)

Adjusted net income (non-GAAP)

$

15,243

 

 

$

25,855

 

 

 

 

 

Basic earnings per share (GAAP)

$

0.79

 

 

$

0.65

 

Adjusted basic earnings per share (non-GAAP)

$

0.37

 

 

$

0.64

 

(a) Net income (GAAP) and Adjusted net income (non-GAAP) include a pre-tax charge of $5.7 million or $0.11 per share, after-tax, of strategic transaction costs.

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

Quarterly Cash Dividend

On May 23, 2019, our Board of Directors approved an increase to the quarterly cash dividend to $0.385 per share of common stock from our previous quarterly rate of $0.36 per share. This represents an increase in the annualized cash dividend from $1.44 to $1.54 per share. The dividend increase commenced with the June 28, 2019, dividend payment to shareholders of record as of the close of business on June 14, 2019.

Under the Merger Agreement, the Company may not declare or pay dividends or distributions on shares of common stock in an amount in excess of $0.385 per share for quarterly dividends declared before June 1, 2020 and $0.41 per share for quarterly dividends declared on or after June 1, 2020. For more information about the Merger, refer to “Agreement and Plan of Merger” of this news release.

On July 25, 2019, our Board of Directors declared a quarterly cash dividend of $0.385 per share payable on September 30, 2019, to shareholders of record as of the close of business on September 16, 2019.

Capital and Liquidity

As of June 30, 2019, our capital structure, including common stock equity, long-term debt, and short-term borrowings under the revolving credit facility (“RCF”) consisted of 43.0% common stock equity and 57.0% debt. At June 30, 2019, we had a balance of $12.9 million in cash and cash equivalents. Based on current projections, we believe that we will have adequate liquidity through our current cash balances, cash from operations, available borrowings under the RCF and debt issuances in the capital markets or, after the closing of the Merger, an equity commitment from the Parent to meet all of our anticipated cash requirements during the next twelve months.

Cash flows from operations for the six months ended June 30, 2019, were $57.6 million, compared to $74.4 million for the six months ended June 30, 2018. A component of cash flows from operations is the change in net over-collection and under-collection of fuel revenues. The difference between fuel revenues collected and fuel expense incurred is deferred to be either refunded (over-recoveries) or surcharged (under-recoveries) to customers in the future. During the six months ended June 30, 2019, we had fuel over-recoveries of $10.7 million compared to over-recoveries of fuel costs of $1.0 million during the six months ended June 30, 2018. At June 30, 2019, we had a net fuel over-recovery balance of $21.7 million, including over-recoveries of $20.3 million in our Texas, $1.3 million in our New Mexico and $0.1 million in our FERC jurisdictions. On April 29, 2019, the Company filed a petition with the PUCT, which was assigned PUCT Docket No. 49482, requesting authority to implement, beginning on June 1, 2019, a four-month, interim fuel refund of $19.4 million in fuel cost over-recoveries, including interest, for the period from April 2016 through March 2019. On May 30, 2019, the Company’s fuel refund was approved on an interim basis. The Company implemented the fuel refund in customer bills on June 1, 2019. An agreed proposed order approving final rates was filed by all parties on June 10, 2019, and the case has been remanded to the PUCT for a final order.

During the six months ended June 30, 2019, our primary capital requirements were related to the construction and purchase of electric utility plant, payment of common stock dividends and purchases of nuclear fuel. Capital expenditures for new electric utility plant were $112.4 million in the six months ended June 30, 2019, compared to $117.3 million in the six months ended June 30, 2018. Capital expenditures for 2019 are expected to be approximately $249 million.

Contacts

Media Contacts

Eddie Gutierrez

915.543.5763

eduardo.gutierrez@epelectric.com

Investor Relations

Lisa Budtke

915.543.5947

lisa.budtke@epelectric.com

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