El Paso Electric Announces Fourth Quarter and Annual 2019 Financial Results

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

Overview

Generally Accepted Accounting Principles (“GAAP”) Financial Measures

  • For the fourth quarter of 2019, El Paso Electric Company (“EE” or the “Company”) reported net income of $12.9 million, or $0.32 basic and diluted earnings per share. In the fourth quarter of 2018, EE reported net loss of $15.3 million, or $0.38 basic and diluted loss per share.
  • For the twelve months ended December 31, 2019, EE reported net income of $123.0 million, or $3.02 basic and $3.01 diluted earnings per share. Net income for the twelve months ended December 31, 2018, was $84.3 million, or $2.07 basic and diluted earnings per share.

Non-GAAP Financial Measures

  • For the fourth quarter of 2019, EE reported adjusted net income of $2.5 million, or $0.06 adjusted basic earnings per share. In the fourth quarter of 2018, EE reported adjusted net income of $2.8 million, or $0.07 adjusted basic earnings per share.
  • For the twelve months ended December 31, 2019, EE reported adjusted net income of $92.2 million, or $2.26 adjusted basic earnings per share. Adjusted net income for the twelve months ended December 31, 2018 was $94.7 million, or $2.33 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 in the Company’s Palo Verde nuclear decommissioning trust funds (“NDT”). 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 (loss) and Basic earnings (loss) per share, the most directly comparable GAAP financial measures, respectively.

“We are pleased to have reached several milestones regarding Infrastructure Investments Fund’s acquisition of El Paso Electric,” said Adrian J. Rodriguez, Interim Chief Executive Officer. “The Public Utility Commission of Texas approved the proposed acquisition as being in the public interest, the New Mexico Hearing Examiner recommended that the New Mexico Public Regulation Commission adopt the unopposed stipulation, we received the necessary approvals from the City of El Paso, Texas, and the necessary consents have been received from the Federal Trade Commission and the Federal Communications Commission. These events signify the shared belief that this transaction will provide meaningful value for our customers, employees, and communities. As we continue to work through the regulatory approval process, we look forward to the anticipated closing of the Merger in the first half of 2020.”

Summary Results

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

 

 

Three Months Ended

 

Twelve Months Ended

 

 

Pre-Tax Effect

 

After-Tax Effect

 

Basic EPS

 

Pre-Tax Effect

 

After-Tax Effect

 

Basic EPS

December 31, 2018

 

 

$(15,285

)

 

$(0.38

)

 

 

 

$84,315

 

$2.07

 

Change in:

 

 

 

 

 

 

 

 

 

 

 

Investment and interest income, NDT

$35,824

 

 

28,635

 

 

0.70

 

 

$51,777

 

 

41,365

 

 

1.01

 

 

Retail non-fuel base revenues

6,998

 

 

5,529

 

 

0.14

 

 

9,553

 

 

7,547

 

 

0.19

 

 

Strategic transaction costs

(2,637

)

 

(2,277

)

 

(0.06

)

 

(12,110

)

 

(10,214

)

 

(0.25

)

 

O&M expenses at fossil-fuel generating plants

(2,099

)

 

(1,659

)

 

(0.04

)

 

3,030

 

 

2,393

 

 

0.06

 

 

Depreciation and amortization

(1,581

)

 

(1,249

)

 

(0.03

)

 

(5,690

)

 

(4,495

)

 

(0.11

)

 

Other

 

 

(752

)

 

(0.01

)

 

 

 

2,126

 

 

0.05

 

December 31, 2019

 

 

$12,942

 

 

$0.32

 

 

 

 

$123,037

 

 

$3.02

 

Fourth Quarter of 2019

Net income (loss) for the three months ended December 31, 2019, when compared to the three months ended December 31, 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 $13.1 million for the three months ended December 31, 2019, compared to net realized and unrealized losses of $22.6 million for the three months ended December 31, 2018, on securities held in the NDT. Refer to “Use of Non-GAAP Financial Measures” for further details.
  • Increased retail non-fuel base revenues primarily due to $3.0 million of revenues in Texas for the period of July 30, 2019 through December 31, 2019, related to the Transmission Cost Recovery Factor (“TCRF”) Settlement Agreement approved by the Public Utility Commission of Texas (“PUCT”) on December 16, 2019, and a $1.8 million increase related to the Distribution Cost Recovery Factor (“DCRF”) approved by the PUCT on September 27, 2019 applicable to customer billings issued on or after October 1, 2019. Excluding the impact of rate changes, retail non-fuel base revenues increased $2.1 million primarily due to increased revenues from sales to public authorities of $1.1 million caused by a 4.7% increase in kilowatt-hour (“kWh”) sales and small commercial and industrial customers of $0.7 million which primarily resulted from a 2.1% increase in the average number of small commercial and industrial customers served in the three months ended December 31, 2019, compared to the three months ended December 31, 2018. Non-fuel base revenues and kWh sales for the three months ended December 31, 2019, are provided by customer class under chart “Three Months Ended December 31, 2019 and 2018 Sales and Revenues Statistics (Unaudited) of this news release. Refer to “Texas Regulatory Matters” for further details.

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

  • Increased strategic transaction costs of $2.6 million incurred in connection with the pending 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” below for further details.
  • Increased operations and maintenance (“O&M”) expenses related to the Company’s fossil-fuel generating plants primarily due to increased maintenance costs at Newman Power Station (“Newman”) and increased outage costs at Newman Unit 5.
  • Increased depreciation and amortization expense primarily due to increased plant balances.

Full Year 2019

Net income for the twelve months ended December 31, 2019, when compared to the twelve months ended December 31, 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 $38.5 million for the twelve months ended December 31, 2019, compared to net realized and unrealized losses of $13.0 million for the twelve months ended December 31, 2018, on securities held in the NDT. This increase primarily relates to higher levels of market returns experienced in both the international and domestic equity markets during the twelve months ended December 31, 2019, when compared to the twelve months ended December 31, 2018. Refer to “Use of Non-GAAP Financial Measures” for further details.
  • Increased retail non-fuel base revenues primarily due to (i) a $3.8 million increase related to the 1% increase in the City of El Paso franchise fee on gross revenues for services within the City of El Paso applicable to customer billings issued on or after October 1, 2018, (ii) $3.0 million of revenues in Texas for the period of July 30, 2019 through December 31, 2019, related to the TCRF Settlement Agreement approved by the PUCT on December 16, 2019, and (iii) a $2.0 million increase related to the DCRF approved by the PUCT on September 27, 2019 applicable to customer billings issued on or after October 1, 2019. Excluding the impact of rate changes, retail non-fuel base revenues increased $1.0 million primarily due to increased revenues from residential customers of $1.4 million caused by a 0.3% increase in kWh sales which primarily resulted from a 1.6% increase in the average number of residential customers served. Non-fuel base revenues and kWh sales for the twelve months ended December 31, 2019 are provided by customer class under chart “Twelve Months Ended December 31, 2019 and 2018 Sales and Revenues Statistics (Unaudited)” of this news release. Refer to “Texas Regulatory Matters” for further details.
  • Decreased O&M expenses related to the Company’s fossil-fuel generating plants primarily due to decreased outage costs at Newman Units 1 & 2 and Rio Grande Power Station (“Rio Grande”) Unit 8. These decreases were partially offset by increased outage costs at Newman Unit 4 and increased maintenance costs at Montana Power Station and Rio Grande.

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

  • Increased strategic transaction costs of $12.1 million incurred in connection with the pending Merger between the Company and an affiliate of IIF. Refer to “Agreement and Plan of Merger” below for further details.
  • Increased depreciation and amortization expense primarily due to increased plant balances.

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 the closing of the Merger, each share of common stock including outstanding and unvested restricted stock and unvested performance 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: (i) approval of the shareholders of the Company, (ii) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period, (iii) receipt of all required regulatory and statutory approvals without the imposition of a Burdensome Condition, (iv) absence of any law or order prohibiting the consummation of the Merger and (v) 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.

On August 2, 2019, the Company filed a definitive proxy statement with the SEC in connection with the Merger.

On August 13, 2019, the Company, Parent and IIF US Holding 2 LP, an affiliate of IIF, as applicable, filed (i) the joint report and application for regulatory approvals with the PUCT requesting approval of the Merger pursuant to the Texas Public Utility Regulatory Act, (ii) the joint application for regulatory approvals with the New Mexico Public Regulation Commission (“NMPRC”) requesting approval of the Merger pursuant to the New Mexico Public Utility Act and NMPRC Rule 450, (iii) the joint application requesting approval of the Merger with the Federal Energy Regulatory Commission (“FERC”) under Section 203 of the Federal Power Act and (iv) the joint application for regulatory approval for the indirect transfer of the Company’s Nuclear Regulatory Commission (“NRC”) licenses to Parent from the NRC under the Atomic Energy Act of 1954. In addition, on August 13, 2019, the Company and Parent sought the authorization of the Federal Communications Commission (“FCC”) to assign or transfer control of the Company’s FCC licenses. On December 4, 2019, the Company and Parent received consent from the FCC to transfer the Company’s FCC licenses.

On August 16, 2019, the Company and Parent filed the notification and report form with the Antitrust Division of the Department of Justice and the Federal Trade Commission (“FTC”) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), as amended, and the rules and regulations promulgated thereunder. On September 3, 2019, the Company and Parent received notice from the FTC granting early termination of the waiting period under the HSR Act.

At a special meeting of the Company’s shareholders held on September 19, 2019, the Company’s shareholders approved the Merger Agreement and the transactions contemplated thereby, including the Merger, and the compensation that will or may become payable by the Company to its named executive officers in connection with the Merger.

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 September 20, 2019, the Company submitted the Franchise Agreement Assignment Application to the City of El Paso to receive the City’s consent to the Merger. On February 4, 2020, the City of El Paso passed an ordinance approving the Franchise Agreement Assignment Application and granting the City of El Paso’s consent to the Merger.

On November 21, 2019, the Company and IIF reached an agreement in principle with the PUCT staff and most intervenors regarding the Merger. The PUCT issued an order delaying the hearing on the merits in order to assist in reaching a unanimous settlement. The parties continued discussions and provided an update on the status of settlement at the PUCT meeting on December 13, 2019. A non-unanimous settlement was filed with the PUCT on December 18, 2019 resolving substantially all issues in the application. The hearing at the PUCT on the non-unanimous issues was held on January 7, 2020, at the conclusion of which the PUCT requested the Company and IIF attend the PUCT’s January 16, 2020 open meeting to answer any follow-up questions. On January 16, 2020, the PUCT approved the Merger and issued its final order on January 28, 2020.

On January 3, 2020, the Company and IIF filed an unopposed stipulation with the NMPRC regarding the Merger. A hearing at the NMPRC for the unopposed stipulation was held on January 16, 2020. On January 16, 2020, the Hearing Examiner agreed with the consent of parties to waive the briefing. On February 12, 2020, the Hearing Examiner issued an Amended Certification of the Stipulation in which it is recommended that the NMPRC approve the unopposed stipulation subject to the parties agreeing to the Hearing Examiner’s modifications. A final order is expected in March 2020.

On December 5, 2019, the FERC requested additional information regarding the parties to the Merger. On January 6, 2020, the Company and IIF filed a joint response to FERC’s inquiry. On January 17, 2020, the Company and IIF filed a second supplement to the application. The FERC established a January 27, 2020 deadline date for comments on the filings. Several motions to intervene were filed, along with a protest of the January 6, 2020 response. On February 6, 2020, the Company and IIF filed a reply to the January 27, 2020 protest. The joint applications filed with the FERC and the NRC are pending.

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 U.S. Securities and Exchange Commission (the “SEC”) on June 3, 2019, and its definitive proxy statement relating to the special meeting of shareholders filed with the SEC on August 2, 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 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 September 12, 2019, the Company filed an unopposed settlement agreement and proposed order for a TCRF revenue requirement of $7.5 million with a provision for recovery of revenue relating to the period from July 30, 2019 to December 31, 2019. Such revenue through December 31, 2019, approximated $3.0 million. On December 16, 2019, the PUCT issued a final order approving the settlement agreement, and the Company’s TCRF rates became effective in customer bills beginning January 1, 2020. On January 14, 2020, the Company filed with the PUCT a proposed surcharge in compliance with the final order issued in PUCT Docket No. 49148 for recovery of the $3.0 million related to 2019, over a period of 12 months beginning on April 1, 2020. The filing was assigned PUCT Docket No.50256, and on February 7, 2020, the surcharge was approved through delegated authority by a Commission Administrative Law Judge.

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 August 13, 2019, the Company filed an unopposed settlement agreement and proposed order which resolved all issues in the proceeding and approved a DCRF revenue requirement of $7.8 million. On September 27, 2019, the PUCT issued a final order approving the settlement agreement, and the Company’s DCRF rates became effective in customer bills beginning October 1, 2019.

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 pending Merger. The NMPRC order requires the Company to file its next rate case application within three months of the conclusion of the proceeding addressing the pending Merger in New Mexico. 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 (loss), and non-GAAP adjusted basic earnings per share is reconciled to GAAP basic earnings (loss) per share.

 

Three Months Ended

 

December 31,

 

2019 (a)

 

2018

 

(In thousands except for per share data)

Net income (loss) (GAAP)

$

12,942

 

 

$

(15,285

)

Adjusting items before income tax effects

 

 

 

Unrealized (gains) losses, net

(13,079

)

 

22,331

 

Realized (gains) losses, net

(8

)

 

319

 

Total adjustments before income tax effects

(13,087

)

 

22,650

 

Income taxes on above adjustments

2,618

 

 

(4,530

)

Adjusting items, net of income taxes

(10,469

)

 

18,120

 

Adjusted net income (non-GAAP)

$

2,473

 

 

$

2,835

 

 

 

 

 

Basic earnings (loss) per share (GAAP)

$

0.32

 

 

$

(0.38

)

Adjusted basic earnings per share (non-GAAP)

$

0.06

 

 

$

0.07

 

(a) 

Net income (GAAP) and Adjusted net income (non-GAAP) include a pre-tax charge of $2.6 million or $0.06 per share, after-tax, of strategic transaction costs.

 

Twelve Months Ended

 

December 31,

 

2019 (a)

 

2018

 

(In thousands except for per share data)

Net income (GAAP)

$

123,037

 

 

$

84,315

 

Adjusting items before income tax effects

 

 

 

Unrealized (gains) losses, net

(35,852

)

 

18,601

 

Realized gains, net

(2,662

)

 

(5,634

)

Total adjustments before income tax effects

(38,514

)

 

12,967

 

Income taxes on above adjustments

7,703

 

 

(2,593

)

Adjusting items, net of income taxes

(30,811

)

 

10,374

 

Adjusted net income (non-GAAP)

$

92,226

 

 

$

94,689

 

 

 

 

 

Basic earnings per share (GAAP)

$

3.02

 

 

$

2.07

 

Adjusted basic earnings per share (non-GAAP)

$

2.26

 

 

$

2.33

 

(a)

Net income (GAAP) and Adjusted net income (non-GAAP) include a pre-tax charge of $12.1 million or $0.25 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 (loss) and basic earnings (loss) per share, respectively. Furthermore, the Company’s presentation of any non-GAAP financial measure may not be comparable to similarly titled measures used by other companies. The Company believes adjusted net income and adjusted basic earnings per share are useful financial measures for investors and analysts in understanding the Company’s core operating performance because each measure removes the effects of variances reported in the Company’s results of operations that are not indicative of fundamental changes in the earnings capacity of the Company.

Contacts

Media Contacts
Eddie Gutierrez

915.543.5763

[email protected]

Investor Relations
Lisa Budtke

915.543.5947

[email protected]

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