Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K
2018-08-02
Earnings, Exhibits
8-K
2018-06-28
Off-BS Arrangement, Exhibits
8-K
2018-05-24
Shareholder Vote, Other Events
8-K
2018-05-03
Earnings, Exhibits
8-K
2018-04-05
Officers
8-K
2018-02-27
Earnings, Exhibits
8-K
2018-01-31
Officers, Exhibits
Comparables
PPL
PPL
ETR
Entergy
EBR
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HNP
Huaneng Power
CPL
Cpfl Energy
PAM
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NEP
Nextera Energy Partners
CEPU
Central Puerto
TVE
Tennessee Valley Authority
ELJ
Entergy Louisiana Holdings
EE 2018-09-30
Content
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-15
eeexhibit1520180930q3.htm
EX-31.01
eeex_310120180930q3.htm
EX-32.01
eeex_320120180930q3.htm
El Paso Electric Earnings 2018-09-30
EE 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 a2018september10-q.htm SEPTEMBER 30, 2018 FORM10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-14206
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas
74-0607870
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
Stanton Tower, 100 North Stanton, El Paso, Texas
79901
(Address of principal executive offices)
(Zip Code)
(915) 543-5711
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
As of October 31, 2018, there were 40,691,951 shares of the Company’s no par value common stock outstanding.
DEFINITIONS
The following abbreviations, acronyms or defined terms used in this report are defined below:
Abbreviations, Acronyms or Defined Terms
Terms
A&G
Administrative and general
ABFUDC
Allowance for Borrowed Funds Used During Construction
ACE
Affordable Clean Energy
AEFUDC
Allowance for Equity Funds Used During Construction
AFUDC
Allowance for Funds Used During Construction
ANPP Participation Agreement
Arizona Nuclear Power Project Participation Agreement dated August 23, 1973, as amended
AOCI
Accumulated Other Comprehensive Income
APS
Arizona Public Service Company
ARO
Asset Retirement Obligations
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
CAA
Clean Air Act
CCN
Certificate of Convenience and Necessity
Company
El Paso Electric Company
CPP
Clean Power Plan
CWIP
Construction Work In Progress
DOE
U.S. Department of Energy
El Paso
City of El Paso, Texas
EPA
The U.S. Environmental Protection Agency
Exchange Act
The Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Four Corners
Four Corners Generating Station
FPPCAC
New Mexico Fuel and Purchased Power Cost Adjustment Clause
GAAP
U.S. Generally Accepted Accounting Principles
GHG
Greenhouse Gas
HAFB
Holloman Air Force Base
IRS
U.S. Internal Revenue Service
kW
Kilowatt(s)
kWh
Kilowatt-hour(s)
Las Cruces
City of Las Cruces, New Mexico
MPS
The Company's Montana Power Station
MW
Megawatt(s)
MWh
Megawatt-hour(s)
NAAQS
National Ambient Air Quality Standards
NAV
Net Asset Value
Newman
The Company's Newman Power Station
NDT
The Company's Palo Verde nuclear decommissioning trust funds
NMPRC
New Mexico Public Regulation Commission
NMPRC Final Order
NMPRC Final Order in Case No. 15-00127-UT
NOL carryforwards
Net Operating Loss carryforwards
(i)
Abbreviations, Acronyms or Defined Terms
Terms
OATT
Open Access Transmission Tariff
O&M
Operations and maintenance
Palo Verde
Palo Verde Generating Station
Ppb
Parts Per Billion
PUCT
Public Utility Commission of Texas
RCF
The Company's Revolving Credit Facility
RGEC
Rio Grande Electric Cooperative
RGRT
Rio Grande Resources Trust II
Rio Grande
The Company's Rio Grande Power Station
SAB 118
SEC Staff Accounting Bulletin No. 118
SEC
U.S. Securities and Exchange Commission
Securities Act
The Securities Act of 1933, as amended
TCJA
The federal legislation commonly referred to as the Tax Cuts and Jobs Act of 2017
Texas Fuel Rule
Texas fuel cost recovery rule
U.S.
United States
2016 PUCT Final Order
PUCT Final Order in Docket No. 44941
2017 Form 10-K
Annual Report of El Paso Electric Company on Form 10-K for the fiscal year ended December 31, 2017
Nuclear fuel; includes fuel in process of $70,778 and $59,689, respectively
205,991
194,933
Less accumulated amortization
(82,840
)
(74,475
)
Net nuclear fuel
123,151
120,458
Net utility plant
3,044,840
2,928,437
Current assets:
Cash and cash equivalents
15,965
6,990
Accounts receivable, principally trade, net of allowance for doubtful accounts of $2,275 and $2,300, respectively
117,950
88,585
Inventories, at cost
53,078
50,910
Prepayments and other
13,838
10,307
Total current assets
200,831
156,792
Deferred charges and other assets:
Decommissioning trust funds
297,030
286,866
Regulatory assets
83,764
96,036
Other
17,728
16,232
Total deferred charges and other assets
398,522
399,134
Total assets
$
3,644,193
$
3,484,363
See accompanying notes to financial statements.
1
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
September 30, 2018
December 31, 2017
(Unaudited)
CAPITALIZATION AND LIABILITIES
(In thousands except for share data)
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 65,672,747 and 65,694,829 shares issued, and 155,941 and 133,859 restricted shares, respectively
$
65,829
$
65,829
Capital in excess of stated value
327,320
326,117
Retained earnings
1,257,397
1,159,667
Accumulated other comprehensive income (loss), net of tax
(34,633
)
11,058
1,615,913
1,562,671
Treasury stock, 25,136,737 and 25,244,350 shares, respectively, at cost
(418,713
)
(420,506
)
Common stock equity
1,197,200
1,142,165
Long-term debt, net of current portion
1,385,254
1,195,988
Total capitalization
2,582,454
2,338,153
Current liabilities:
Short-term borrowings under the revolving credit facility
19,362
173,533
Accounts payable, principally trade
73,537
59,270
Taxes accrued
42,054
35,660
Interest accrued
20,961
12,470
Over-collection of fuel revenues, regulatory liability
9,905
6,225
Other
38,252
29,067
Total current liabilities
204,071
316,225
Deferred credits and other liabilities:
Accumulated deferred income taxes
325,383
305,023
Accrued pension liability
77,261
83,838
Accrued post-retirement benefit liability
28,130
26,417
Asset retirement obligation
99,144
93,029
Regulatory liabilities
299,431
296,685
Other
28,319
24,993
Total deferred credits and other liabilities
857,668
829,985
Commitments and contingencies
Total capitalization and liabilities
$
3,644,193
$
3,484,363
See accompanying notes to financial statements.
2
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Operating revenues
$
300,271
$
297,470
$
712,780
$
720,648
Operating expenses:
Fuel and purchased power
71,086
75,319
176,737
191,492
Operations and maintenance
83,355
74,685
252,370
236,145
Depreciation and amortization
24,169
22,565
71,941
66,994
Taxes other than income taxes
21,728
21,213
54,616
54,208
200,338
193,782
555,664
548,839
Operating income
99,933
103,688
157,116
171,809
Other income (deductions):
Allowance for equity funds used during construction
824
668
2,462
2,209
Investment and interest income, net
16,815
8,989
33,042
30,308
Miscellaneous non-operating income
3,037
3,075
9,245
8,867
Miscellaneous non-operating deductions
(3,263
)
(3,180
)
(8,775
)
(8,677
)
17,413
9,552
35,974
32,707
Interest charges (credits):
Interest on long-term debt and revolving credit facility
19,603
18,215
55,785
54,989
Other interest
4,127
4,673
13,896
13,746
Capitalized interest
(1,488
)
(1,193
)
(4,067
)
(3,831
)
Allowance for borrowed funds used during construction
(881
)
(671
)
(2,551
)
(2,173
)
21,361
21,024
63,063
62,731
Income before income taxes
95,985
92,216
130,027
141,785
Income tax expense
22,714
32,532
30,427
50,024
Net income
$
73,271
$
59,684
$
99,600
$
91,761
Basic earnings per share
$
1.80
$
1.47
$
2.45
$
2.26
Diluted earnings per share
$
1.79
$
1.47
$
2.44
$
2.26
Dividends declared per share of common stock
$
0.360
$
0.335
$
1.055
$
0.980
Weighted average number of shares outstanding
40,535,489
40,427,589
40,514,961
40,408,100
Weighted average number of shares and dilutive potential shares outstanding
40,697,047
40,551,315
40,644,493
40,516,777
See accompanying notes to financial statements.
3
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
Twelve Months Ended
September 30,
2018
2017
Operating revenues
$
908,929
$
908,685
Operating expenses:
Fuel and purchased power
229,996
245,425
Operations and maintenance
336,506
315,677
Depreciation and amortization
95,790
88,214
Taxes other than income taxes
71,271
69,444
733,563
718,760
Operating income
175,366
189,925
Other income (deductions):
Allowance for equity funds used during construction
3,278
3,365
Investment and interest income, net
41,587
39,281
Miscellaneous non-operating income
12,428
11,901
Miscellaneous non-operating deductions
(11,677
)
(11,542
)
45,616
43,005
Interest charges (credits):
Interest on long-term debt and revolving credit facility
73,766
73,312
Other interest
18,320
17,757
Capitalized interest
(5,258
)
(5,083
)
Allowance for borrowed funds used during construction
(3,353
)
(2,992
)
83,475
82,994
Income before income taxes
137,507
149,936
Income tax expense
31,407
52,519
Net income
$
106,100
$
97,417
Basic earnings per share
$
2.61
$
2.40
Diluted earnings per share
$
2.60
$
2.40
Dividends declared per share of common stock
$
1.39
$
1.29
Weighted average number of shares outstanding
40,494,482
40,398,022
Weighted average number of shares and dilutive potential shares outstanding
40,630,758
40,498,642
See accompanying notes to financial statements.
4
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended
Nine Months Ended
Twelve Months Ended
September 30,
September 30,
September 30,
2018
2017
2018
2017
2018
2017
Net income
$
73,271
$
59,684
$
99,600
$
91,761
$
106,100
$
97,417
Other comprehensive income (loss):
Unrecognized pension and post-retirement benefit costs:
Net gain (loss) arising during period
—
—
—
—
12,634
(20,053
)
Prior service benefit
—
—
—
—
—
32,697
Reclassification adjustments included in net income for amortization of:
Prior service benefit
(2,413
)
(2,414
)
(7,243
)
(7,243
)
(9,657
)
(9,657
)
Net loss
1,640
1,695
4,790
5,083
6,483
6,516
Net unrealized gains/losses on marketable securities:
Net holding gains (losses) arising during period
(948
)
5,945
(4,909
)
18,124
2,242
17,275
Reclassification adjustments for net (gains) losses included in net income
443
(1,765
)
1,108
(9,122
)
(396
)
(11,192
)
Net losses on cash flow hedges:
Reclassification adjustment for interest expense included in net income
144
134
423
396
559
523
Total other comprehensive income (loss) before income taxes
(1,134
)
3,595
(5,831
)
7,238
11,865
16,109
Income tax benefit (expense) related to items of other comprehensive income (loss):
Unrecognized pension and post-retirement benefit costs
174
262
520
716
(3,811
)
(3,539
)
Net unrealized (gains) losses on marketable securities
105
(825
)
761
(1,814
)
(347
)
(1,163
)
Losses on cash flow hedges
(32
)
(49
)
(113
)
(174
)
(162
)
(220
)
Total income tax benefit (expense)
247
(612
)
1,168
(1,272
)
(4,320
)
(4,922
)
Other comprehensive income (loss), net of tax
(887
)
2,983
(4,663
)
5,966
7,545
11,187
Comprehensive income
$
72,384
$
62,667
$
94,937
$
97,727
$
113,645
$
108,604
See accompanying notes to financial statements.
5
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
2018
2017
Cash flows from operating activities:
Net income
$
99,600
$
91,761
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of electric plant in service
71,941
66,994
Amortization of nuclear fuel
29,822
32,494
Deferred income taxes, net
24,369
47,457
Allowance for equity funds used during construction
(2,462
)
(2,209
)
Other amortization and accretion
15,427
14,934
Net gains on decommissioning trust funds
(9,683
)
(9,122
)
Other operating activities
31
(762
)
Change in:
Accounts receivable
(33,958
)
(39,298
)
Inventories
(1,480
)
(2,988
)
Prepayments and other
(5,716
)
(5,120
)
Accounts payable
4,920
525
Taxes accrued
7,632
6,539
Interest accrued
8,491
5,741
Net over-collection of fuel revenues
3,680
13,888
Other current liabilities
9,185
(138
)
Deferred charges and credits
(321
)
(1,950
)
Net cash provided by operating activities
221,478
218,746
Cash flows from investing activities:
Cash additions to utility property, plant and equipment
(171,433
)
(148,436
)
Cash additions to nuclear fuel
(28,769
)
(31,618
)
Insurance proceeds received for equipment
5,351
8,069
Capitalized interest and AFUDC:
Utility property, plant and equipment
(5,013
)
(4,382
)
Nuclear fuel and other
(4,067
)
(3,831
)
Allowance for equity funds used during construction
2,462
2,209
Decommissioning trust funds:
Purchases, including funding of $1.6 million and $3.4 million, respectively
(74,438
)
(80,785
)
Sales and maturities
70,156
76,498
Other investing activities
3,639
(204
)
Net cash used for investing activities
(202,112
)
(182,480
)
Cash flows from financing activities:
Dividends paid
(42,898
)
(39,747
)
Borrowings under the revolving credit facility:
Proceeds
504,707
532,332
Payments
(658,878
)
(446,005
)
Proceeds from issuance of senior notes
125,000
—
Proceeds from issuance of RGRT senior notes
65,000
—
Payment on maturing senior notes
—
(50,000
)
Payment on maturing pollution control bonds
—
(33,300
)
Other financing activities
(3,322
)
(906
)
Net cash used for financing activities
(10,391
)
(37,626
)
Net increase (decrease) in cash and cash equivalents
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, 2017 ("2017 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the 2017 Form 10-K. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at September 30, 2018 and December 31, 2017; the results of its operations and comprehensive operations for the three, nine and twelve months ended September 30, 2018 and 2017; and its cash flows for the nine months ended September 30, 2018 and 2017. The results of operations and comprehensive operations for the three and nine months ended September 30, 2018 and 2017, and the cash flows for the nine months ended September 30, 2018 and 2017, are not necessarily indicative of the results to be expected for the full calendar year.
Pursuant to the rules and regulations of the United States ("U.S.") Securities Exchange Commission ("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 U.S. Generally Accepted Accounting Principles ("GAAP").
Reclassification. Certain amounts in the financial statements for 2017 have been reclassified to conform with the 2018 presentation. The Company implemented Accounting Standards Update ("ASU") 2017-07, Compensation - Retirement Benefits, and ASU 2016-15, Statement of Cash Flows, in the first quarter of 2018, retrospective to all periods presented in the Company's financial statements. See "New Accounting Standards Adopted" below for further details.
Use of Estimates. The preparation of financial statements in conformity with GAAP 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 ("AROs"). Actual results could differ from those estimates.
Revenues. The Company recognizes revenue associated with contracts with customers when performance obligations under the terms of the contract with the customer are satisfied. Revenue is measured as the amount of consideration the Company receives in exchange for transferring goods or providing services to the customer. Taxes collected concurrently with revenue producing activities are excluded from revenue. Unbilled revenues are recorded for estimated amounts of energy delivered in the period following the customer's last billing cycle to the end of the reporting period. Unbilled revenues are estimated based on monthly generation volumes and by applying an average revenue/kilowatt-hour ("kWh") to the number of estimated kWhs delivered but not billed. Accounts receivable included accrued unbilled revenues of $31.0 million at September 30, 2018 and $22.2 million at December 31, 2017. 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.
New Accounting Standards Adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards either as equity or liabilities, and classification on the statements of cash flows. 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 ("NOL 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. On January 1, 2018, the Company adopted the new accounting standard using the modified retrospective method. There was no cumulative effect adjustment at the initial application of the new standard. In addition, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the ongoing impact of the new standard to be immaterial to net income. As required by the standard, revenues of $5.9 million related to reimbursed costs of energy efficiency programs approved by the Company's regulators are reported in year-to-date operating revenues from customers prospectively, as opposed to being offset with associated costs within operations and maintenance. Related expenses of an equal amount are reported in operations and maintenance expenses. See Note B, Revenues, for additional information.
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. The Company adopted the new standard effective January 1, 2018. The adoption of ASU 2016-01 eliminates the requirements to classify investments in equity securities with readily determinable fair values into trading or available for sale and requires entities to measure equity investments at fair value and recognize any changes in fair value in the Statements of Operations. ASU 2016-01 requires a modified retrospective approach and therefore comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Upon adoption of the new standard, the Company recorded a cumulative effect adjustment, net of income taxes, to increase retained earnings by $41.0 million with an offset to accumulated other comprehensive income ("AOCI"). In addition, the Company recorded net gains of $3.7 million related to equity securities still held at September 30, 2018. In March 2018, the FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980), which provides clarification to ASU 2016-01.
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 Company adopted the new standard effective January 1, 2018. ASU 2016-15 was applied using a retrospective transition method to each period presented. Accordingly, the Company presented in the Statement of Cash Flows insurance proceeds received for equipment of $5.4 million and $8.1 million, respectively, for the nine months ended September 30, 2018 and 2017 as cash inflows from investing activities.
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 Accounting Standards Codification ("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 Company adopted the new standard effective January 1, 2018. The amendments in ASU 2017-07 were applied retrospectively for the income statement presentation of the service cost component and the other components of net benefit costs. The Company elected to apply the practical expedient and used the amounts disclosed in its pension and other postretirement benefit plan note for the 2017 comparative period as the estimation basis for applying the retrospective presentation requirements. See Note J, Employee Benefits, for additional information.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB 118"), to add various SEC paragraphs for clarification due to the federal legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 ("TCJA"). The Company adopted ASU 2018-05 upon issuance and implemented SAB 118 in December of 2017 in conjunction with the enactment of the TCJA.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350). ASU 2018-15 aligns the requirements for capitalizing implementation costs for a cloud computing arrangement with the requirements for capitalizing implementation costs for an internal use software license. Implementation costs for a cloud computing arrangement will be capitalized or expensed based on the nature of the costs and the project’s stage in which they are incurred by applying the existing guidance for internal use software implementation costs. Capitalized costs for a cloud computing arrangement will be presented on the same line of the balance sheet as any related prepaid amounts for the arrangement, while amortization of those costs will be presented on the same line of the income statement as the related hosting fees. Early adoption is permitted, and entities may apply the guidance either prospectively to eligible costs incurred on or after the effective date or retrospectively. The Company early-adopted this guidance in the third quarter of 2018, on a prospective basis, and the adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.
New Accounting Standards to be Adopted in the Future
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 lease guidance for capital leases and operating leases. The impact of leases reported in the Company's operating results and statement of cash flows is expected to be similar to previous GAAP. ASU 2016-02 requires the recognition in the statement of financial position, by the lessee, of a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. How leases are recorded in regard to financial position represents a significant change from previous GAAP guidance. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. 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 continues to monitor activities of the FASB, including the impact of ASU 2018-01, Land Easement Practical expedient for Transition to Topic 842, ASU 2018-11, Targeted Improvements, and the proposed update related to narrow scope improvements for lessors. ASU 2018-11 allows entities to adopt the standard with a cumulative effect adjustment as of the beginning of the adoption year, while maintaining prior year comparative financial information and disclosures as reported. ASU 2018-01 provides an optional practical expedient to not evaluate existing or expired land easements under Topic 842, if those land easements were not previously accounted for as leases under ASC Topic 840. The Company currently anticipates that it will apply the practical expedient under ASU 2018-01 to its existing or expired land easements as part of its transition to Topic 842. The Company's implementation process is continuing and includes finalizing the following activities: the analysis of the Company's lease population, the implementation of a new lease accounting system, the determination of the transition method and practical expedients that will be applied, and evaluating the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance. The Company will adopt this guidance effective January 1, 2019.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 changes how companies measure and recognize credit impairment for many financial assets. The new 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. 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 February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), as a result of concerns raised due to the TCJA. More specifically, because the remeasurement of deferred taxes due to the change in the federal corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within AOCI (referred to as stranded tax effects) do not reflect the appropriate tax rate. ASU 2018-02 generally allows companies to reclassify stranded taxes from AOCI to retained earnings. The amount of the adjustment would be the difference between the historical federal corporate income tax rate of 35% and the newly enacted 21% federal corporate income tax rate. The provisions of ASU 2018-02 are effective for fiscal years and interim periods within that reporting period beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim periods for reporting periods for which financial statements have not been issued. The Company is currently evaluating the impact of ASU 2018-02 and its impact on regulated utilities. At September 30, 2018, stranded taxes in AOCI are approximately $7.2 million.
Interest on long-term debt and borrowings under the revolving credit facility
$
47,479
$
47,412
Income tax paid, net
2,480
1,576
Non-cash investing and financing activities:
Changes in accrued plant additions
9,347
(6,228
)
Grants of restricted shares of common stock
1,030
1,171
Issuance of performance shares
1,499
932
B. Revenues
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), for all of its contracts using the modified retrospective method. There was no cumulative effect adjustment at the initial application of the new standard. In addition, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the ongoing impact of the new standard to be immaterial to net income and no significant changes in the Company's business processes and internal controls were necessary upon adoption of the new standard.
The following table disaggregates revenue from contracts with customers, for the three, nine and twelve months ended September 30, 2018 (in thousands):
September 30, 2018
Three Months Ended
Nine Months Ended
Twelve Months Ended
Retail
$
265,971
$
633,578
$
807,626
Wholesale
28,253
63,354
79,456
Wheeling (transmission)
5,145
13,578
17,981
Total revenues from contracts with customers
299,369
710,510
905,063
Other
902
2,270
3,866
Total operating revenues
$
300,271
$
712,780
$
908,929
The Company recognizes revenue when performance obligations under the terms of the contract with the customer are satisfied. Revenue is measured as the amount of consideration the Company receives in exchange for transferring goods or providing services to the customer. Taxes collected concurrently with revenue producing activities are excluded from revenue. The Company has elected the optional invoice practical expedient for Wholesale and Wheeling revenues, as the invoice amount will correspond directly to the value provided by the Company's performance to date.
Retail. Retail contracts represent the Company's primary revenue source. The Company has determined that retail electric service to residential, commercial and industrial, and public authority customers represents an implied daily contract with the customer. The contract is comprised of an obligation to supply and distribute electricity and related capacity. Revenue is recognized, over time, equal to the product of the applicable tariff rates, as approved by the Public Utility Commission of Texas (the "PUCT") and the New Mexico Public Regulation Commission, (the "NMPRC"), and the volume of the electricity delivered to the customer, or through the passage of time based upon providing the service of standing ready. Unbilled revenues are recognized at month end based on estimated monthly generation volumes and by applying an average revenue per kWh to the number of estimated kWhs delivered but not billed to customers, and recorded as a receivable for the period following the last billing cycle to the end of the reporting period. Retail customers receive a bill monthly, with payment due sixteen days after issuance.
Wholesale. Wholesale contracts primarily include forward power sales into markets outside the Company’s service territory when the Company has competitive generation capacity available, after meeting its regulated service obligations. Pricing is either fixed or based on an index rate with consideration potentially including variable components. Uncertainties regarding the variable consideration will be resolved when the transaction price is known at the point of delivering the energy. The obligation to deliver the electricity is satisfied over time as the customer receives and consumes the electricity. Wholesale customers are invoiced on the 10th day of each month, with payment due by the 20th day of the month. In the case of the sale of renewable energy certificates, the transaction price is allocated to the performance obligation to deliver the confirmed quantity of the certificates based on the stand alone selling price of each certificate. Revenue is recognized as control of the certificates is transferred to the customer. The customer is invoiced upon the completed transfer of the certificates, with payment due within ten business days. Wholesale also includes an annual agreement between the Company and one of its wholesale customers, Rio Grande Electric Cooperative ("RGEC"), which involves the provision of full requirements electric service from the Company to RGEC. The rates for this service are recalculated annually and require Federal Energy Regulatory Commission ("FERC") approval.
Wheeling (transmission). Wheeling involves the Company providing point-to-point transmission service, which includes the receipt of capacity and energy at designated point(s) and the transfer of such capacity and energy to designated point(s) of delivery on either a firm or non-firm basis for periods of one year or less. The performance obligation to provide capacity and transmit energy is satisfied over time as the Company performs. Transmission customers are invoiced on a monthly basis, with payment due within twenty days of receipt of the invoice.
Other. Other includes alternative revenue program revenue relating to the Company’s potential bonus awards from the PUCT and the NMPRC mandated energy efficiency programs. Both the PUCT and the NMPRC allow for the potential to earn an incentive bonus if the Company achieves its approved energy efficiency goals under the applicable programs. The Company recognizes revenue related to the energy efficiency program incentives at the point in time that the amount is objectively determinable generally based upon an approved order from the regulator, is probable of recovery, and if it is expected to be collected within 24 months. Other revenue also includes (i) late payment fees, (ii) leasing income, and (iii) the Company’s allocated share, based on ownership, of sales of surplus effluent water from Palo Verde Generating Station ("Palo Verde").
Accounts receivable. Accounts receivable is principally comprised of revenue from contracts with customers. The Company recognizes expense for accounts that are deemed uncollectible in operating expense. The Company recognized $1.1 million, $2.1 million and $3.0 million of uncollectible expense for the three, nine and twelve months ended September 30, 2018, respectively.
Upon adoption of ASU 2016-01, Financial Instruments-Overall, the Company recorded, on January 1, 2018, a cumulative effect adjustment, net of income taxes, to increase retained earnings by $41.0 million with an offset to AOCI. Changes in Accumulated Other Comprehensive Income (Loss) (net of tax) by component are presented below (in thousands):
Three Months Ended September 30, 2018
Three Months Ended September 30, 2017
Unrecognized Pension and Post-retirement Benefit Costs
Net Unrealized Gains (Losses) on Debt 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 as previously reported
$
(19,124
)
$
(3,478
)
$
(11,144
)
$
(33,746
)
$
(24,915
)
$
32,296
$
(11,514
)
$
(4,133
)
Other comprehensive income before reclassifications
—
(764
)
—
(764
)
—
4,768
—
4,768
Amounts reclassified from accumulated other comprehensive income (loss)
(599
)
364
112
(123
)
(457
)
(1,413
)
85
(1,785
)
Balance at end of period
$
(19,723
)
$
(3,878
)
$
(11,032
)
$
(34,633
)
$
(25,372
)
$
35,651
$
(11,429
)
$
(1,150
)
Nine Months Ended September 30, 2018
Nine Months Ended September 30, 2017
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 as previously reported
$
(17,790
)
$
40,190
$
(11,342
)
$
11,058
$
(23,928
)
$
28,463
$
(11,651
)
$
(7,116
)
Cumulative effect adjustment
—
(41,028
)
—
(41,028
)
—
—
—
—
Other comprehensive income before reclassifications
—
(3,923
)
—
(3,923
)
—
14,491
—
14,491
Amounts reclassified from accumulated other comprehensive income (loss)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss) for the three, nine and twelve months ended September 30, 2018 and 2017 are as follows (in thousands):
Details about Accumulated Other Comprehensive Income (Loss) Components
Three Months Ended September 30,
Nine Months Ended September 30,
Twelve Months Ended September 30,
Affected Line Item in the Statements of Operations
2018
2017
2018
2017
2018
2017
Amortization of pension and post-retirement benefit costs:
Prior service benefit
$
2,413
$
2,414
$
7,243
$
7,243
$
9,657
$
9,657
Miscellaneous non-operating income
Net loss
(1,640
)
(1,695
)
(4,790
)
(5,083
)
(6,483
)
(6,516
)
Miscellaneous non-operating deductions
773
719
2,453
2,160
3,174
3,141
Income (loss) before income taxes
Income tax effect
(174
)
(262
)
(520
)
(716
)
(872
)
(1,742
)
Income tax (benefit) expense
599
457
1,933
1,444
2,302
1,399
Net income (loss)
Marketable securities:
Net realized gain (loss) on sale of securities
(443
)
1,765
(1,108
)
9,122
396
11,192
Investment and interest income, net
(443
)
1,765
(1,108
)
9,122
396
11,192
Income (loss) before income taxes
Income tax effect
79
(352
)
225
(1,819
)
(58
)
(2,176
)
Income tax (benefit) expense
(364
)
1,413
(883
)
7,303
338
9,016
Net income (loss)
Loss on cash flow hedge:
Amortization of loss
(144
)
(134
)
(423
)
(396
)
(559
)
(523
)
Interest on long-term debt and revolving credit facility
The rates and services of the Company are regulated by incorporated municipalities in Texas, the PUCT, the NMPRC and the 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 - full requirement customer) 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 ("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. On August 25, 2016, the PUCT issued the PUCT Final Order in Docket No. 44941 ("2016 PUCT Final Order"). 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 Generating Station ("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 2016 PUCT Final Order on August 25, 2016. Accordingly, it reported in the third quarter of 2016 the cumulative effect of the 2016 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 ("2017 Texas Retail Rate Case"). On November 2, 2017, the Company filed the Joint Motion to Implement Uncontested Stipulation and Agreement with the Administrative Law Judges for the 2017 Texas Retail Rate Case.
On December 18, 2017, the PUCT issued the PUCT Final Order in Docket No. 46831 ("2017 PUCT Final Order"), which provides, among other things, for the following: (i) an annual non-fuel base rate increase of $14.5 million; (ii) a return on equity of 9.65%; (iii) all new plant in service as filed in the Company's rate filing package was prudent and used and useful and therefore is included in rate base; (iv) recovery of the costs of decommissioning Four Corners in the amount of $5.5 million over a seven year period beginning August 1, 2017; (v) the Company to recover reasonable rate case expenses of approximately $3.4 million through a separate surcharge over a three year period; and (vi) a requirement that the Company file a refund tariff if the federal statutory income tax rate, as it relates to the Company, is decreased before the Company files its next rate case. The 2017 PUCT Final Order also established baseline revenue requirements for recovery of future transmission and distribution investment costs (for which the Company may seek recovery after January 1, 2019, and for which the Company anticipates requesting recovery in the first quarter of 2019) and includes a minimum monthly bill of $30.00 for new residential customers with distributed generation, such as private rooftop solar. Additionally, the 2017 PUCT Final Order allows for the annual recovery of $2.1 million of nuclear decommissioning funding and establishes annual depreciation expense that is approximately $1.9 million lower than the annual amount requested by the Company in its initial filing. Finally, the 2017 PUCT Final Order allows for the Company to recover revenues associated with the relate back of rates to consumption on and after July 18, 2017, through a separate surcharge.
New base rates, including additional surcharges associated with rate case expenses and the relate back of rates to consumption on and after July 18, 2017, through December 31, 2017, were implemented in January 2018.
For financial reporting purposes, the Company deferred any recognition of the Company's request in its 2017 Texas Retail Rate Case until it received the 2017 PUCT Final Order on December 18, 2017. Accordingly, it reported in the fourth quarter of 2017 the cumulative effect of the 2017 PUCT Final Order, which related back to July 18, 2017.
The 2017 PUCT Final Order required the Company to file a refund tariff if the federal statutory income tax rate, as it relates to the Company, were decreased before the Company files its next rate case. Following the enactment of the TCJA on December 22, 2017, and in compliance with the 2017 PUCT Final Order, on March 1, 2018, the Company filed with the PUCT and each of its municipalities a proposed refund tariff designed to reduce base charges for Texas customers equivalent to the expected annual decrease of $22.7 million in federal income tax expense resulting from the tax law changes. This filing was assigned PUCT Docket
No. 48124. On March 27, 2018, the PUCT approved the Company's proposed refund tariff on an interim basis, subject to refund or surcharge, for customer billing effective April 1, 2018. Each of the Company's municipalities also implemented the Company's proposed tax credits on an interim basis effective April 1, 2018. The refund will be reflected in rates over a period of a year and will be updated annually until new base rates are implemented pursuant to the Company's next rate case filing. No party requested a hearing in the case before the PUCT by the deadline of April 16, 2018, and on April 18, 2018, the PUCT Staff filed its final recommendation supporting approval of the Company's application. The Company filed an agreed proposed order for final approval on behalf of all parties except the City of El Paso on April 30, 2018, and on May 31, 2018, the City of El Paso filed a notice with the PUCT stating that the City Council had authorized agreement with the proposed order. The refund tariff case is pending with the refund tariff subject to a final order from the PUCT.
Energy Efficiency Cost Recovery Factor. On May 1, 2017, the Company filed its annual application, which was assigned PUCT Docket No. 47125, to establish its energy efficiency cost recovery factor for 2018. In addition to projected energy efficiency costs for 2018 and a reconciliation of collections to prior year actual costs, the Company requested approval of an incentive bonus for the 2016 energy efficiency program results in accordance with PUCT rules. Interim rates were approved effective January 1, 2018. The Company, the PUCT Staff and the City of El Paso reached an agreement that includes an incentive bonus of $0.8 million. The agreement was filed on January 25, 2018, and was approved by the PUCT on February 15, 2018.
On May 1, 2018, the Company filed its annual application, which was assigned PUCT Docket No. 48332, to establish its energy efficiency cost recovery factor for 2019. In addition to projected energy efficiency costs for 2019 and a reconciliation to prior year actual costs, the Company requested approval of a $1.0 million incentive bonus for the 2017 energy efficiency program results in accordance with PUCT rules. Instead of convening an actual hearing on the merits of this case, the parties agreed to enter into the record the pre-filed testimony of the parties and certain other exhibits and then file briefs on the contested issues. The Company cannot predict the outcome of this matter at this time.
Fuel and Purchased Power Costs. The Company's actual fuel costs, including purchased power energy costs, are recovered from customers through a fixed fuel factor. The PUCT has adopted the fuel cost recovery rule (the "Texas Fuel Rule") that allows the Company to seek periodic adjustments to its fixed fuel factor. The Company can seek to revise its fixed fuel factor based upon the approved formula at least four months after its last revision except in the month of December. The Texas Fuel Rule requires the Company to request to refund fuel costs in any month when the over-recovery balance exceeds a threshold material amount and it expects fuel costs to continue to be materially over-recovered. The Texas Fuel Rule also permits the Company to seek to surcharge fuel under-recoveries in any month the balance exceeds a threshold material amount and it expects fuel cost recovery to continue to be materially under-recovered. Fuel over and under-recoveries are considered material when they exceed 4% of the previous twelve months' fuel costs. All such fuel revenue and expense activities are subject to periodic final review by the PUCT in periodic fuel reconciliation proceedings.
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.
On October 13, 2017, the Company filed a request, which was assigned PUCT Docket No. 47692, to decrease the Texas fixed fuel factor by approximately 19% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. The decrease in the Texas fixed fuel factor became effective beginning with the November 2017 billing month.
On April 13, 2018, the Company filed a request with the PUCT, which was assigned PUCT Docket No. 48264, to decrease the Texas fixed fuel factor by approximately 29% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On April 25, 2018, the Company's proposed fuel factors were approved on an interim basis effective for the first billing cycle of the May 2018 billing month. The revised factor was approved by the PUCT and the docket closed on May 22, 2018. As of September 30, 2018, the Company had a net fuel over-recovery balance of approximately $6.9 million in Texas.
On October 15, 2018, the Company filed a request with the PUCT, which was assigned PUCT Docket No. 48781, to decrease the Texas fixed fuel factor by approximately 6.99% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On October 25, 2018, the Company's fixed fuel factor was approved on an interim basis effective for the first billing cycle of the November 2018 billing month. Once the final approval is received by the PUCT, the Texas fixed fuel factor will continue thereafter until changed by the PUCT.
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 April 1, 2013, through March 31, 2016. On June 29, 2017, the PUCT approved a settlement in this proceeding. The settlement provides for the reconciliation of fuel and purchased power costs incurred from April 1, 2013, through March 31, 2016. Additionally, the settlement modifies and tightens the Palo Verde performance rewards measurement bands beginning with the 2018 performance period. The financial results for the nine and twelve-month periods ended September 30, 2017, include a $5.0 million, pre-tax increase to income reflecting the settlement of the Texas fuel reconciliation proceeding. This amount represents Palo Verde performance rewards associated with the 2013 to 2015 performance periods net of disallowed fuel and purchased power costs as approved in the settlement. The April 1, 2016, through September 30, 2018, Texas jurisdictional fuel and purchased power costs subject to prudence review total approximately $335.0 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 three-megawatt ("MW") solar photovoltaic system located at Montana Power Station ("MPS"). Participation is on a voluntary basis, and customers contract for a set capacity (kilowatt ("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. On April 19, 2017, the Company announced that the entire three-MW program was fully subscribed by approximately 1,500 Texas customers. The community solar facility began commercial operation on May 31, 2017.
On March 20, 2018, the Company filed a petition with the PUCT and each of its regulatory authorities to expand its community solar program to include two-MW of solar powered generation from the ten-MW solar photovoltaic facility located at Newman Power Station ("Newman") and to reduce rates under the community solar tariff. The case before the PUCT was assigned PUCT Docket No. 48181 and is currently pending with hearings scheduled for December 4, 2018. The Company cannot predict the outcome of the case at this time.
Other Required Approvals. The Company has obtained other required approvals for tariffs and other approvals required by the Texas Public Utility Regulatory Act 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 the NMPRC 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.
Future New Mexico Rate Case Filing. On April 12, 2017, the NMPRC issued an order in Case No. 15-00109-UT requiring the Company to make a rate filing in New Mexico no later than July 31, 2019, using an appropriate historical test year period.
New Mexico Order Commencing Review of the Effects of the TCJA on Regulated New Mexico Utilities. On January 24, 2018, the NMPRC initiated a proceeding in Case No. 18-00016-UT into the impact of the TCJA on New Mexico regulated utilities. On February 23, 2018, the Company responded to a NMPRC Staff inquiry regarding the proceeding. On April 4, 2018, the NMPRC issued an order requiring the Company to file a proposed interim rate rider to adjust the Company’s New Mexico base revenues in amounts equivalent to the Company’s reduced income tax expense for New Mexico customers resulting from the TCJA, to be implemented on or before May 1, 2018. The NMPRC order further requires that the Company record and track a regulatory liability for the excess accumulated deferred income taxes created by the change in the federal corporate income tax rate, consistent with the effective date of the TCJA, and subject to amortization determined by the NMPRC in the Company’s next general rate case. The Company recorded such a regulatory liability during the quarter ended December 31, 2017. On April 16, 2018, after consultation with the New Mexico Attorney General pursuant to the NMPRC order, the Company filed an interim rate rider with a proposed effective date of May 1, 2018. The annualized credits expected to be refunded to New Mexico customers approximate $4.9 million. The Company implemented the interim rate rider in customer bills beginning May 1, 2018 pursuant to the NMPRC order.
On September 5, 2018, the NMPRC issued an order in Case No. 17-00255-UT involving Southwestern Public Service Company’s ("SPS’s") request to change rates in which the NMPRC directed SPS to refund the difference in corporate tax rate from January 1, 2018, through the effective date of new rates. SPS appealed the NMPRC order to the New Mexico Supreme Court
in Southwestern Public Service Co. v. NMPRC, No. S-1-SC-37248, challenging the refund as prohibited retroactive ratemaking among other reasons. The Court issued a partial and interim stay of the rates on September 26, 2018. On September 12, 2018, the NMPRC in Case No. 18-00016-UT issued an Order Regarding the Disposition of Tax Savings Under the Federal Tax Cuts and Jobs Act of 2017 which put public utilities on notice that all revenue collected through general rates for the purpose of payment of federal income taxes is and will continue to be subject to possible refund upon a subsequent determination to be made in the appropriate pending or future Commission adjudicatory hearing. On October 11, 2018, SPS filed a Notice of Appeal of that NMPRC order to the New Mexico Supreme Court in Southwestern Public Service Co. v. NMPRC, No. S-1-SC-37308. A procedural schedule has not been issued in either case. In the event the NMPRC order in Case No. 17-00255-UT is upheld by the New Mexico Supreme Court, the Company would likely be required to record and refund approximately $1.2 million to its New Mexico customers, which represents tax benefits received by the Company for the period January 1, 2018, through April 30, 2018. The Company is monitoring the SPS cases and cannot determine the outcome of the cases at this time.
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 (the "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 NMPRC Final Order, 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, also was approved in the NMPRC Final Order. New Mexico jurisdictional costs subject to prudence review are costs from January 1, 2015, through September 30, 2018 that total approximately $200.1 million. At September 30, 2018, the Company had a net fuel over-recovery balance of approximately $2.9 million in New Mexico. As required, the Company filed a request to continue use of its FPPCAC with the NMPRC on January 5, 2018, which was assigned Case No. 18-00006-UT. Hearings in the case were held July 30 through August 6, 2018. The Company cannot predict the outcome of this case at this time.
5-MW Holloman Air Force Base ("HAFB") Facility Certificate of Convenience and Necessity ("CCN"). On October 7, 2015, in Case No. 15-00185-UT, the NMPRC issued a final order approving a CCN for a five-MW solar power generation facility located on HAFB in the Company's service territory in New Mexico. The Company and HAFB negotiated a retail contract, which includes a power sales agreement for the facility, to replace the existing load retention agreement that was approved by NMPRC final order issued October 5, 2016, in Case No. 16-00224-UT. The solar generation facility began commercial operation on October 18, 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 application 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. NMPRC rules authorize continuation of the energy efficiency programs and incentive approved in Case No. 16-00185-UT through 2018.
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. In addition, on June 30, 2017, the Company filed its 2016 Annual Report for Energy Efficiency Programs, which included an incentive for verified 2016 program performance of $0.4 million that was approved in Case No. 13-00176-UT. The Company recorded the $0.4 million approved incentive in operating revenues in the third quarter of 2017.
On July 2, 2018, the Company filed its required application for approval of its 2019-2021 Energy Efficiency and Load Management Plan and cost recovery factor. The application includes a request for a base incentive of 7.1% of program expenditures, or approximately $0.4 million annually for 2019-2021. The application was assigned Case No. 18-00116-UT and is currently pending with hearings scheduled for November 7, 2018. The Company cannot predict the outcome of this case at this time.
Community Solar. On April 24, 2018, the Company filed an application with the NMPRC to initiate a community solar program to include construction and ownership of a two-MW solar photovoltaic system located in Doña Ana County near the City of Las Cruces. Customer participation will be on a voluntary basis, and customers will contract for a set capacity (kW) amount and receive all energy produced by their subscribed capacity. The application was assigned Case No. 18-00099-UT and was dismissed without prejudice on October 31, 2018.
Integrated Resource Plan. On September 17, 2018, the Company filed its Integrated Resource Plan for the period 2018-2037 with the NMPRC in Case No. 18-00293-UT as required by regulation and the Joint Stipulation in NMPRC Case No. 15-00241-
UT, which was the Company’s prior integrated resource plan filing. The triennial filing requires a public advisory process as part of the development of the plan to identify a cost-effective portfolio of resources. The filed plan is subject to written public comments filed with the NMPRC to which the Company responded on October 29, 2018. The Utility Division Staff of the NMPRC is required to file a written recommendation on or about November 16, 2018, as to whether the NMPRC should accept the proposed plan as filed. The NMPRC may accept the plan as compliant with regulation or determine that the plan is not compliant and return it to the Company with instructions for re-filing. The Company cannot predict the outcome of the NMPRC’s review of the plan or the outcome of this case at this time.
Issuance of Long-Term Debt, Securities Financing, and Guarantee of Debt. On October 7, 2015, the Company received approval in NMPRC Case No. 15-00280-UT to guarantee the issuance of up to $65.0 million of long-term debt by the Rio Grande Resources Trust II (the "RGRT") to finance future purchases of nuclear fuel and to refinance existing nuclear fuel debt obligations, which remains effective. Under this authorization, on June 28, 2018, the RGRT completed the sale of $65.0 million in aggregate principal amount of 4.07% Senior Guaranteed Notes due August 15, 2025, as further described below (the "RGRT Notes"). On October 4, 2017, the Company received additional approval in NMPRC Case No. 17-00217-UT to amend and extend the Company's Revolving Credit Facility (the "RCF"), issue up to $350.0 million in long-term debt and to redeem and refinance the $63.5 million 2009 Series A 7.25% Pollution Control Bonds and the $37.1 million 2009 Series B 7.25% Pollution Control Bonds, which have optional redemptions beginning in 2019. The NMPRC approval to issue $350.0 million in long-term debt supersedes its prior approval. Under this authorization, on June 28, 2018, the Company issued $125.0 million in aggregate principal amount of the Company's 4.22% Senior Notes due August 15, 2028. Additionally, on September 13, 2018, the Company and the Bank of New York Mellon Trust Company, N.A., as trustee of the RGRT, entered into a $350.0 million third amended and restated credit agreement. See Note L, Long-Term Debt and Financing Obligations.
Other Required Approvals. The Company has obtained other required approvals for tariffs and other approvals as required by the New Mexico Public Utility Act and the NMPRC.
Federal Regulatory Matters
Inquiry Regarding the Effect of the TCJA on Commission-Jurisdictional Rates and Order to Show Cause. On March 15, 2018, the FERC issued two show cause orders under Section 206 of the Federal Power Act and Rule 209(a) of the FERC’s Rules of Practice and Procedure, directing 48 individual public utilities with stated transmission rates or transmission formula rates with a fixed line item of 35% for the federal income tax component to, within 60 days of the date of the orders, either (1) propose revisions to their transmission rates under their open access transmission tariffs or transmission owner tariffs on file with the FERC, or (2) show cause why they should not be required to do so. The Company was included in the list of public utilities impacted by the FERC orders. On May 14, 2018, the Company submitted its response, as required by the FERC order, which demonstrated that the reduced annual income tax does not cause the Company's total transmission revenues to become excessive and therefore no rate reduction was justified. Instead, the Company stated in its response that it will make preparations for a future filing in which it will seek approval for revised Open Access Transmission Tariff ("OATT") rates that would include the recovery of an increased total transmission revenue requirement from OATT customers based on current circumstances and appropriate forward-looking adjustments. The Company expects to file its request for this approval in the third quarter of 2019. The Company cannot predict the outcome of this matter at this time.
Issuance of Long-Term Debt, Securities Financing, and Guarantee of Debt. On October 31, 2017, the FERC issued an order in Docket No. ES17-54-000 approving the Company’s filing to (i) amend and extend the RCF; (ii) issue up to $350.0 million in long-term debt; (iii) guarantee the issuance of up to $65.0 million of long-term debt by the RGRT; and (iv) redeem and refinance the $63.5 million 2009 Series A 7.25% Pollution Control Bonds and the $37.1 million 2009 Series B 7.25% Pollution Control Bonds, which have optional redemptions beginning in 2019. The order also approved the Company's request to continue to utilize the Company's existing RCF with the ability to amend and extend at a future date. The authorization is effective from November 15, 2017, through November 14, 2019, and supersedes prior FERC approvals. Under this authorization, on June 28, 2018, the Company issued $125.0 million in aggregate principal amount of the Company's 4.22% Senior Notes due August 15, 2028, and the RGRT completed the sale of $65.0 million in aggregate principal amount of its 4.07% Senior Guaranteed Notes due August 15, 2025. Additionally, on September 13, 2018, the Company and the Bank of New York Mellon Trust Company, N.A., as trustee of the RGRT, entered into a $350.0 million third amended and restated credit agreement. See Note L, Long-Term Debt and Financing Obligations.
Other Required Approvals. The Company has obtained required approvals for rates, tariffs and other approvals as required by the FERC.
Spent Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987, the U.S. Department of Energy ("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 with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998. Pursuant to the terms of the August 18, 2014 settlement agreement, and as amended with the DOE, Arizona Public Service Company ("APS") files annual claims for the period July 1 of the then-previous year to June 30 of the then-current year on behalf of itself and those utilities that share in power and energy entitlements, and bear certain allocated costs, with respect to Palo Verde pursuant to the Arizona Nuclear Power Project Participation Agreement dated August 23, 1973, as amended ("ANPP Participation Agreement").
Palo Verde Operations and Maintenance Expense. Included in "Operations and maintenance" in the Company's Statements of Operations are expenses associated with Palo Verde as follows (in thousands):
Dividends. The Company paid $14.6 million and $13.6 million in quarterly cash dividends during the three months ended September 30, 2018 and 2017, respectively. The Company paid a total of $42.9 million and $56.5 million in quarterly cash dividends during the nine and twelve months ended September 30, 2018, respectively. The Company paid a total of $39.7 million and $52.3 million in quarterly cash dividends during the nine and twelve months ended September 30, 2017, respectively.
Basic and Diluted Earnings Per Share. The basic and diluted earnings per share are presented below (in thousands except for share data):
Three Months Ended September 30,
2018
2017
Weighted average number of common shares outstanding:
Basic number of common shares outstanding
40,535,489
40,427,589
Dilutive effect of unvested performance awards
161,558
123,726
Diluted number of common shares outstanding
40,697,047
40,551,315
Basic net income per common share:
Net income
$
73,271
$
59,684
Income allocated to participating restricted stock
(272
)
(234
)
Net income available to common shareholders
$
72,999
$
59,450
Diluted net income per common share:
Net income
$
73,271
$
59,684
Income reallocated to participating restricted stock
Weighted average number of common shares outstanding:
Basic number of common shares outstanding
40,494,482
40,398,022
Dilutive effect of unvested performance awards
136,276
100,620
Diluted number of common shares outstanding
40,630,758
40,498,642
Basic net income per common share:
Net income
$
106,100
$
97,417
Income allocated to participating restricted stock
(383
)
(387
)
Net income available to common shareholders
$
105,717
$
97,030
Diluted net income per common share:
Net income
$
106,100
$
97,417
Income reallocated to participating restricted stock
(383
)
(387
)
Net income available to common shareholders
$
105,717
$
97,030
Basic net income per common share:
Distributed earnings
$
1.39
$
1.29
Undistributed earnings
1.22
1.11
Basic net income per common share
$
2.61
$
2.40
Diluted net income per common share:
Distributed earnings
$
1.39
$
1.29
Undistributed earnings
1.21
1.11
Diluted net income per common share
$
2.60
$
2.40
The number of restricted stock awards and performance shares at 100% performance level excluded from the calculation of the diluted number of common shares outstanding because their effect was antidilutive is presented below:
Three Months Ended
Nine Months Ended
Twelve Months Ended
September 30,
September 30,
September 30,
2018
2017
2018
2017
2018
2017
Restricted stock awards
74,278
71,052
67,288
69,290
66,238
65,707
Performance shares (a)
—
—
15,326
—
11,494
—
________________________
(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.
The Company files income tax returns in the 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, Texas, Arizona, and New Mexico jurisdictions for years prior to 2013.
For the three months ended September 30, 2018 and 2017, the Company’s effective tax rate was 23.7% and 35.3%, respectively. For the nine months ended September 30, 2018 and 2017, the Company’s effective tax rate was 23.4% and 35.3%, respectively. For the twelve months ended September 30, 2018 and 2017, the Company's effective tax rate was 22.8% and 35.0%, respectively. The federal statutory tax rate is 21% in 2018 and 35% in 2017. The Company's effective tax rates for all periods in 2018 and 2017 differ from the federal statutory tax rate primarily due to capital gains in the decommissioning trusts which are taxed at the federal rate of 20%, the tax benefit of stock incentive plans, the allowance for equity funds used during construction ("AEFUDC"), and state taxes.
The results for the three, nine and twelve months ended September 30, 2018, contain provisional estimates of the impact of the TCJA. These amounts are considered provisional because they use estimates for which tax returns have not yet been filed and because estimated amounts may be impacted by future regulatory and accounting guidance if and when issued. The Company will adjust these provisional amounts as further information becomes available and as we refine our calculations. As permitted by recent guidance issued by the SEC, these adjustments will occur during a reasonable “measurement period” not to exceed twelve months from the date of enactment.
In February 2018, the FASB issued ASU 2018-02. The Company is currently evaluating the impact of ASU 2018-02 and its impact on regulated utilities. See Note A, Principles of Preparation - New Accounting Standards to be Adopted in the Future, for additional information.
H. Commitments, Contingencies and Uncertainties
For a full discussion of commitments and contingencies, see Note K of the Notes to Financial Statements in the 2017 Form 10-K. In addition, see Notes D and E above and Notes C and E of the Notes to Financial Statements in the 2017 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 that 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 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 2017 Form 10-K.
Environmental Matters
General. The Company is subject to extensive laws, regulations and permit requirements with respect to air and greenhouse gas emissions, water discharges, soil and water quality, waste management and disposal, natural resources and other environmental matters by federal, state, regional, tribal and local authorities. Failure to comply with such laws, regulations and requirements can result in actions by authorities or other third parties that might seek to impose on the Company administrative, civil and/or criminal penalties or other sanctions. In addition, releases of pollutants or contaminants into the environment can result in costly cleanup liabilities. These laws, regulations and requirements are subject to change through modification or reinterpretation, or the introduction of new laws and regulations, and as a result, the Company may face additional capital and operating costs to comply.
National Ambient Air Quality Standards ("NAAQS"). Under the Clean Air Act ("CAA"), the U.S Environmental Protection Agency ("EPA") sets NAAQS for six criteria pollutants considered harmful to public health and the environment, including particulate matter, nitrogen oxide, carbon monoxide, ozone and sulfur dioxide. On October 1, 2015, the EPA released a final rule tightening the primary and secondary NAAQS for ground-level ozone from its 2008 standard levels of 75 parts per billion ("ppb") to 70 ppb. The EPA published the Final Rule on June 4, 2018, designating El Paso County, Texas, as “attainment/unclassifiable” under the 2015 ozone NAAQS and designating a section of southern Dona Ana County, New Mexico as “nonattainment.” In August, several petitions for review of the Final Rule were filed in the U.S. Court of Appeals for the D.C. Circuit. One of these
petitions, filed by the City of Sunland Park, New Mexico, specifically challenges the “attainment/unclassifiable” designation of El Paso County, Texas. The Company and other intervenors filed and were granted motions to intervene in the challenges to EPA’s 2015 ozone NAAQS designations.
States, including New Mexico, that contain any areas designated as nonattainment are required to complete development of implementation plans in the 2020-2021 timeframe. Most nonattainment areas are expected to have until 2020 or 2023 to meet the primary (health) standard, with the exact attainment date varying based on the ozone level in the area. The Company continues to evaluate what impact these final and proposed NAAQS could have on its operations. If the Company is required to install additional equipment to control emissions at its facilities, the NAAQS, individually or in the aggregate, could have a material impact on its operations and financial results.
Climate Change. The U.S. federal government has either considered, proposed and/or finalized legislation or regulations limiting greenhouse gas ("GHG") emissions, including carbon dioxide. In particular, the U.S. Congress has considered legislation to restrict or regulate GHG emissions. In October 2015, the EPA published a rule establishing guidelines for states to regulate CO2 emissions from existing power plants, known as the Clean Power Plan ("CPP"). Legal challenges to the CPP are ongoing. On August 31, 2018, the EPA published a proposal to replace the CPP called the Affordable Clean Energy ("ACE") rule. At this time the Company cannot determine the impact that the CPP, the ACE rule, and related proposals and legal challenges may have on our financial position, results of operations or cash flows.
I. 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 D and H above and Notes C and K of the Notes to Financial Statements in the 2017 Form 10-K for discussion of the effects of government legislation and regulation on the Company.
J. Employee Benefits
The Company adopted ASU 2017-07, Compensation-Retirement Benefits, effective January 1, 2018. Upon adoption of the new standard, the service cost is included in "Operations and maintenance" in the Company's Statements of Operations. The expected return on plan assets is included in "Investment and interest income, net". The amortization of prior service benefit and amortization of gains are included in "Miscellaneous non-operating income". The amortization of prior service cost and amortization of losses are included in "Miscellaneous non-operating deductions". The interest cost component of net periodic benefit cost is included in "Other interest".
The provisions in ASU 2017-07 were applied retrospectively for the income statement presentation of the service cost component and the other components of net benefit costs. The Company elected to apply the practical expedient and used the amounts disclosed in its pension and other postretirement benefit plan note for the 2017 comparative period as the estimation basis for applying the retrospective presentation requirements. The Company reclassified $2.1 million to "Operations and maintenance" in the Company’s Statement of Operations for the three months ended September 30, 2017 by increasing (i) "Investment and interest income, net" by $5.3 million, (ii) "Miscellaneous non-operating income" by $2.8 million, (iii) "Miscellaneous non-operating deductions" by $2.1 million, and (iv) "Other interest" by $3.9 million. As a result of the reclassifications, "Operations and maintenance" increased to $2.7 million in service cost from the $0.6 million in net periodic benefit cost previously reported.
The Company reclassified $6.2 million to "Operations and maintenance" in the Company’s Statement of Operations for the nine months ended September 30, 2017 by increasing (i) "Investment and interest income, net" by $15.8 million, (ii) "Miscellaneous non-operating income" by $8.5 million, (iii) "Miscellaneous non-operating deductions" by $6.3 million, and (iv) "Other interest" by $11.8 million. As a result of the reclassifications, "Operations and maintenance" increased to $8.1 million in service cost from the $1.9 million in net periodic benefit cost previously reported.
The Company reclassified $8.5 million to "Operations and maintenance" in the Company’s Statement of Operations for the twelve months ended September 30, 2017 by increasing (i) "Investment and interest income, net" by $21.0 million, (ii) "Miscellaneous non-operating income" by $11.3 million, (iii) "Miscellaneous non-operating deductions" by $8.2 million, and (iv) "Other interest" by $15.6 million. As a result of the reclassifications, "Operations and maintenance" increased to $10.7 million in service cost from the $2.2 million in net periodic benefit cost previously reported.
Retirement Plans
The net periodic benefit cost recognized for the three, nine and twelve months ended September 30, 2018 and 2017, is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):