QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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 Street, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
EE
New York Stock Exchange
As of April 30, 2019, there were 40,738,183 shares of the Company’s 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
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
ASU
Accounting Standards Update
Company
El Paso Electric Company
DOE
U.S. Department of Energy
El Paso
City of El Paso, Texas
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
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)
NDT
The Company's Palo Verde nuclear decommissioning trust funds
Newman
The Company's Newman Power Station
NMPRC
New Mexico Public Regulation Commission
O&M
Operations and maintenance
Palo Verde
Palo Verde Generating Station
PCBs
Pollution Control Refunding Revenue Bonds
PUCT
Public Utility Commission of Texas
RCF
The Company's Revolving Credit Facility
RGRT
Rio Grande Resources Trust II
Rio Grande
The Company's Rio Grande Power Station
ROU
Right-of-use
SEC
U.S. Securities and Exchange Commission
TCJA
The federal legislation commonly referred to as the Tax Cuts and Jobs Act of 2017
U.S.
United States
2017 PUCT Final Order
PUCT Final Order in Docket No. 46831
2018 Form 10-K
Annual Report of El Paso Electric Company on Form 10-K for the fiscal year ended December 31, 2018
Nuclear fuel; includes fuel in process of $73,105 and $62,833, respectively
208,552
198,280
Less accumulated amortization
(82,699
)
(72,703
)
Net nuclear fuel
125,853
125,577
Net utility plant
3,120,858
3,085,047
Current assets:
Cash and cash equivalents
8,505
12,900
Restricted cash
38,445
—
Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,514 and $2,070, respectively
70,259
77,855
Inventories, at cost
57,542
55,432
Regulatory assets
7,272
6,972
Prepayments and other
25,531
20,375
Total current assets
207,554
173,534
Deferred charges and other assets:
Decommissioning trust funds
298,338
276,905
Regulatory assets
74,107
74,848
Other
17,713
18,168
Total deferred charges and other assets
390,158
369,921
Total assets
$
3,718,570
$
3,628,502
See accompanying notes to financial statements.
1
EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
March 31, 2019
December 31, 2018
(Unaudited)
CAPITALIZATION AND LIABILITIES
(In thousands except for share data)
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 65,678,261 and 65,707,156 shares issued, and 150,427 and 121,532 restricted shares, respectively
$
65,829
$
65,829
Capital in excess of stated value
328,228
328,480
Retained earnings
1,218,902
1,227,471
Accumulated other comprehensive loss, net of tax
(37,127
)
(38,784
)
1,575,832
1,582,996
Treasury stock, 25,090,505 and 25,147,567 shares, respectively, at cost
(417,943
)
(418,893
)
Common stock equity
1,157,889
1,164,103
Long-term debt, net of current portion
1,286,111
1,285,980
Total capitalization
2,444,000
2,450,083
Current liabilities:
Current maturities of long-term debt
36,550
99,239
Short-term borrowings under the revolving credit facility
202,951
49,207
Accounts payable, principally trade
46,911
58,150
Taxes accrued
28,147
37,139
Interest accrued
19,449
16,478
Regulatory liabilities
26,484
14,686
Other
41,000
38,356
Total current liabilities
401,492
313,255
Deferred credits and other liabilities:
Accumulated deferred income taxes
326,849
325,133
Accrued pension liability
85,012
87,259
Accrued post-retirement benefit liability
25,134
24,575
Asset retirement obligation
103,349
101,108
Regulatory liabilities
298,615
298,570
Other
34,119
28,519
Total deferred credits and other liabilities
873,078
865,164
Commitments and contingencies
Total capitalization and liabilities
$
3,718,570
$
3,628,502
See accompanying notes to financial statements.
2
EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
Three Months Ended
Twelve Months Ended
March 31,
March 31,
2019
2018
2019
2018
Operating revenues
$
174,363
$
175,713
$
902,253
$
921,175
Operating expenses:
Fuel and purchased power
48,326
52,188
225,247
246,660
Operations and maintenance
80,413
80,160
335,136
321,254
Depreciation and amortization
25,126
23,814
97,694
92,723
Taxes other than income taxes
16,189
15,507
71,682
70,640
170,054
171,669
729,759
731,277
Operating income
4,309
4,044
172,494
189,898
Other income (deductions):
Allowance for equity funds used during construction
1,001
920
3,534
3,130
Investment and interest income, net
23,707
5,155
36,929
34,745
Miscellaneous non-operating income
3,048
3,136
12,735
12,292
Miscellaneous non-operating deductions
(2,357
)
(2,743
)
(11,594
)
(11,494
)
25,399
6,468
41,604
38,673
Interest charges (credits):
Interest on long-term debt and revolving credit facility
18,989
17,988
76,425
72,591
Other interest
5,233
4,654
18,469
18,479
Capitalized interest
(1,532
)
(1,214
)
(5,801
)
(4,942
)
Allowance for borrowed funds used during construction
(972
)
(898
)
(3,686
)
(3,082
)
21,718
20,530
85,407
83,046
Income (loss) before income taxes
7,990
(10,018
)
128,691
145,525
Income tax expense (benefit)
1,901
(3,052
)
31,321
50,240
Net income (loss)
$
6,089
$
(6,966
)
$
97,370
$
95,285
Basic earnings (loss) per share
$
0.15
$
(0.17
)
$
2.39
$
2.35
Diluted earnings (loss) per share
$
0.15
$
(0.17
)
$
2.39
$
2.34
Dividends declared per share of common stock
$
0.360
$
0.335
$
1.440
$
1.340
Weighted average number of shares outstanding
40,582,936
40,491,194
40,543,986
40,440,189
Weighted average number of shares and dilutive potential shares outstanding
40,663,753
40,491,194
40,661,228
40,563,625
See accompanying notes to financial statements.
3
EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
Three Months Ended
Twelve Months Ended
March 31,
March 31,
2019
2018
2019
2018
Net income (loss)
$
6,089
$
(6,966
)
$
97,370
$
95,285
Other comprehensive income (loss):
Unrecognized pension and post-retirement benefit costs:
Net gain (loss) arising during period
—
—
(5,898
)
12,634
Reclassification adjustments included in net income for amortization of:
Prior service benefit
(2,186
)
(2,416
)
(9,427
)
(9,657
)
Net loss
843
1,575
5,655
6,657
Net unrealized gains/losses on marketable securities:
Net holding gains (losses) arising during period
2,471
(2,708
)
1,107
14,846
Reclassification adjustments for net (gains) losses included in net income
829
518
1,756
(7,917
)
Net losses on cash flow hedges:
Reclassification adjustment for interest expense included in net income
148
139
577
541
Total other comprehensive income (loss) before income taxes
2,105
(2,892
)
(6,230
)
17,104
Income tax benefit (expense) related to items of other comprehensive income (loss):
Unrecognized pension and post-retirement benefit costs
265
156
2,144
(3,652
)
Net unrealized (gains) losses on marketable securities
(665
)
435
(577
)
(1,366
)
Losses on cash flow hedges
(48
)
(50
)
(143
)
(195
)
Total income tax benefit (expense)
(448
)
541
1,424
(5,213
)
Other comprehensive income (loss), net of tax
1,657
(2,351
)
(4,806
)
11,891
Comprehensive income (loss)
$
7,746
$
(9,317
)
$
92,564
$
107,176
See accompanying notes to financial statements.
4
EL PASO ELECTRIC COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(In thousands except for share data)
Common Stock
Capital in
Excess of Stated Value
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss), Net of Tax
Treasury Stock
Common Stock Equity
Shares
Amount
Shares
Amount
Balances at December 31, 2018
65,828,688
$
65,829
$
328,480
$
1,227,471
$
(38,784
)
25,147,567
$
(418,893
)
$
1,164,103
Restricted common stock grants and deferred compensation
(1,328
)
(31,461
)
524
(804
)
Performance share awards vested
1,478
(39,923
)
665
2,143
Stock awards withheld for taxes
(430
)
12,425
(207
)
(637
)
Forfeited restricted common stock
2,566
(43
)
(43
)
Compensation paid in shares
28
(669
)
11
39
Net income
6,089
6,089
Other comprehensive income
1,657
1,657
Common stock, dividends declared, $0.36 per share
(14,658
)
(14,658
)
Balances at March 31, 2019
65,828,688
$
65,829
$
328,228
$
1,218,902
$
(37,127
)
25,090,505
$
(417,943
)
$
1,157,889
Common Stock
Capital in
Excess of Stated Value
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss), Net of Tax
Treasury Stock
Common Stock Equity
Shares
Amount
Shares
Amount
Balances at December 31, 2017
65,828,688
$
65,829
$
326,117
$
1,159,667
$
11,058
25,244,350
$
(420,506
)
$
1,142,165
Restricted common stock grants and deferred compensation
(560
)
(30,800
)
513
(47
)
Performance share awards vested
360
(68,379
)
1,139
1,499
Stock awards withheld for taxes
(725
)
20,389
(339
)
(1,064
)
Forfeited restricted common stock
2,391
(40
)
(40
)
Compensation paid in shares
35
(1,008
)
17
52
Cumulative effect adjustment for financial instruments
41,028
(41,028
)
—
Net loss
(6,966
)
(6,966
)
Other comprehensive loss
(2,351
)
(2,351
)
Common stock, dividends declared, $0.335 per share
(13,615
)
(13,615
)
Balances at March 31, 2018
65,828,688
$
65,829
$
325,227
$
1,180,114
$
(32,321
)
25,166,943
$
(419,216
)
$
1,119,633
See accompanying notes to financial statements.
5
EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
2019
2018
Cash flows from operating activities:
Net income (loss)
$
6,089
$
(6,966
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of electric plant in service
25,126
23,814
Amortization of nuclear fuel
10,706
10,404
Deferred income taxes, net
1,236
(3,964
)
Allowance for equity funds used during construction
(1,001
)
(920
)
Other amortization and accretion
5,173
5,240
Net losses (gains) on decommissioning trust funds
(15,989
)
2,509
Other operating activities
349
81
Change in:
Accounts receivable
8,352
8,063
Inventories
(2,110
)
1,418
Prepayments and other
(5,519
)
(2,603
)
Accounts payable
(11,021
)
(23,324
)
Taxes accrued
(8,827
)
(7,552
)
Interest accrued
2,971
6,590
Net over-collection of fuel revenues
12,799
7,965
Other current liabilities
1,599
6,697
Deferred charges and credits
(3,513
)
(1,216
)
Net cash provided by operating activities
26,420
26,236
Cash flows from investing activities:
Cash additions to utility property, plant and equipment
(52,428
)
(66,924
)
Cash additions to nuclear fuel
(9,502
)
(9,257
)
Insurance proceeds received for equipment
—
4,175
Capitalized interest and AFUDC:
Utility property, plant and equipment
(1,973
)
(1,818
)
Nuclear fuel and other
(1,532
)
(1,214
)
Allowance for equity funds used during construction
1,001
920
Decommissioning trust funds:
Purchases, including funding of $0.5 million and $0.5 million, respectively
(37,613
)
(33,578
)
Sales and maturities
35,468
31,663
Other investing activities
(724
)
526
Net cash used for investing activities
(67,303
)
(75,507
)
Cash flows from financing activities:
Dividends paid
(14,658
)
(13,615
)
Borrowings under the revolving credit facility:
Proceeds
215,196
192,670
Payments
(61,452
)
(133,136
)
Payment on purchase in lieu of redemption of pollution control bonds
(63,500
)
—
Other financing activities
(653
)
(1,064
)
Net cash provided by financing activities
74,933
44,855
Net increase (decrease) in cash, cash equivalents and restricted cash
34,050
(4,416
)
Cash, cash equivalents and restricted cash at beginning of period
12,900
6,990
Cash, cash equivalents and restricted cash at end of period
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, 2018 ("2018 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the 2018 Form 10-K. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2019 and December 31, 2018; the results of its operations and comprehensive operations for the three and twelve months ended March 31, 2019 and 2018; changes in common stock equity and its cash flows for the three months ended March 31, 2019 and 2018. The results of operations and comprehensive operations for the three months ended March 31, 2019 and 2018, and the cash flows for the three months ended March 31, 2019 and 2018, 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 and 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").
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 ("ARO"). Actual results could differ from those estimates.
Operating Revenues. The Company accrues revenues for services rendered, including unbilled electric service 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 $19.3 million at March 31, 2019 and $21.6 million at December 31, 2018.
The Company’s Texas retail customers are billed under base rates and a fixed fuel factor approved by the Public Utility Commission of Texas ("PUCT"). The Company’s New Mexico retail customers are billed under base rates and a fuel adjustment clause that is adjusted monthly, as approved by the New Mexico Public Regulation Commission ("NMPRC"). The Company's Federal Energy Regulatory Commission ("FERC") sales for resale customers are billed under formula base rates and fuel factors and a fuel adjustment clause that is adjusted monthly. The Company’s recovery of fuel and purchased power expenses is subject to periodic reconciliations of actual fuel and purchased power expenses incurred to actual fuel revenues collected. The difference between fuel and purchased power expenses incurred and fuel revenues charged to customers is reflected as over/under-collection of fuel revenues, which is included in regulatory liabilities/assets - current in the balance sheets. See Part I, Item 1, Financial Statements, Note D of Notes to Financial Statements for further discussion.
Leases. The Company determines if an arrangement contains a lease and the classification of that lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make payments under the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the minimum lease payments over the lease term. In determining lease terms, the Company considers any options to extend or terminate the lease that are reasonably certain of being exercised. As the Company’s leases do not include an implicit rate, the Company uses an estimated incremental borrowing rate, at lease commencement, to determine the present value of the future lease payments. In calculating the incremental borrowing rate, the Company takes into consideration recent debt issuances and other data for instruments with similar characteristics. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. For leases with lease and non-lease components, the Company has elected to account for the consideration as a single lease component. The Company has also elected not to record leases with a term of 12 months or less on the balance sheets. The operating lease ROU assets are included as part of electric plant in service and lease liabilities are included as part of current and non-current liabilities in the Company’s balance sheets.
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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. Effective January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective method, applying the transition provisions to the beginning of the period of adoption rather than to the earliest comparative period presented, which continues to be reported in accordance with previous lease guidance, Accounting Standards Codification Topic 840. The Company adopted the package of practical expedients, which does not require the Company to reassess: (i) whether an arrangement contained a lease, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also adopted the practical expedient related to land easements, which allowed carry forward accounting treatment for existing land easements. The most significant impact of adopting ASU 2016-02, as of January 1, 2019, was the recording of approximately $6.3 million of operating lease liabilities and related ROU assets with no cumulative effect adjustment to retained earnings. The Company anticipates the ongoing impact of the new standard to be immaterial to net income and cash flows. See Part I, Item 1, Financial Statements, Note I of Notes to Financial Statements for further discussion.
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 federal law commonly referred to as the Tax Cuts and Jobs Act of 2017 ("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 accumulated other comprehensive income ("AOCI") (referred to as stranded tax effects) do not reflect the appropriate tax rate. ASU 2018-02 allows companies an election to reclassify stranded taxes from AOCI to retained earnings. The amount of the reclassification would be the difference between the historical federal corporate income tax rate of 35% and the newly enacted 21% federal corporate income tax rate, which approximates $7.2 million. The provisions of ASU 2018-02 are effective for fiscal years and interim periods within that reporting period beginning after December 15, 2018. The Company adopted ASU 2018-02 on January 1, 2019, and has elected to not reclassify stranded taxes from AOCI to retained earnings.
New Accounting Standards to be Adopted in the Future
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.
Interest on long-term debt and borrowings under the revolving credit facility
$
11,592
$
11,967
Income tax refunded, net
(300
)
(1,060
)
Non-cash investing and financing activities:
Changes in accrued plant additions
(218
)
(108
)
Grants of restricted shares of common stock
524
513
Issuance of performance shares
2,143
1,499
Non-cash operating activities:
Operating lease liabilities arising from obtaining ROU assets
6,217
—
B. Revenues
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018, 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 following table disaggregates revenue from contracts with customers, for the three and twelve months ended March 31, 2019 and 2018 (in thousands):
Three Months Ended March 31,
Twelve Months Ended March 31,
2019
2018
2019
2018
Retail
$
132,126
$
146,628
$
775,174
$
826,148
Wholesale
35,691
24,143
102,221
72,641
Wheeling (transmission)
6,005
4,286
20,745
18,133
Total revenues from contracts with customers
173,822
175,057
898,140
916,922
Other
541
656
4,113
4,253
Total operating revenues
$
174,363
$
175,713
$
902,253
$
921,175
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 $0.2 million and $2.5 million of uncollectible expense for the three and twelve months ended March 31, 2019, 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 March 31, 2019
Three Months Ended March 31, 2018
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 Debt Securities
Net Losses on Cash Flow Hedges
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period as previously reported
$
(24,923
)
$
(2,942
)
$
(10,919
)
$
(38,784
)
$
(17,790
)
$
40,190
$
(11,342
)
$
11,058
Cumulative effect adjustment
—
—
—
—
—
(41,028
)
—
(41,028
)
Other comprehensive income before reclassifications
—
1,973
—
1,973
—
(2,159
)
—
(2,159
)
Amounts reclassified from accumulated other comprehensive income (loss)
(1,078
)
662
100
(316
)
(685
)
404
89
(192
)
Balance at end of period
$
(26,001
)
$
(307
)
$
(10,819
)
$
(37,127
)
$
(18,475
)
$
(2,593
)
$
(11,253
)
$
(32,321
)
Twelve Months Ended March 31, 2019
Twelve Months Ended March 31, 2018
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
$
(18,475
)
$
(2,593
)
$
(11,253
)
$
(32,321
)
$
(24,457
)
$
32,872
$
(11,599
)
$
(3,184
)
Cumulative effect adjustment
—
—
—
—
—
(41,028
)
—
(41,028
)
Other comprehensive income before reclassifications
(4,589
)
892
—
(3,697
)
7,951
11,927
—
19,878
Amounts reclassified from accumulated other comprehensive income (loss)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss) for the three and twelve months ended March 31, 2019 and 2018 are as follows (in thousands):
Details about Accumulated Other Comprehensive Income (Loss) Components
Three Months Ended March 31,
Twelve Months Ended March 31,
Affected Line Item in the Statements of Operations
2019
2018
2019
2018
Amortization of pension and post-retirement benefit costs:
Prior service benefit
$
2,186
$
2,416
$
9,427
$
9,657
Miscellaneous non-operating income
Net loss
(843
)
(1,575
)
(5,655
)
(6,657
)
Miscellaneous non-operating deductions
1,343
841
3,772
3,000
Income (loss) before income taxes
Income tax effect
(265
)
(156
)
(835
)
(1,031
)
Income tax (benefit) expense
1,078
685
2,937
1,969
Net income (loss)
Marketable securities:
Net realized gain (loss) on sale of securities
(829
)
(518
)
(1,756
)
7,917
Investment and interest income, net
(829
)
(518
)
(1,756
)
7,917
Income (loss) before income taxes
Income tax effect
167
114
362
(1,553
)
Income tax (benefit) expense
(662
)
(404
)
(1,394
)
6,364
Net income (loss)
Loss on cash flow hedge:
Amortization of loss
(148
)
(139
)
(577
)
(541
)
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
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 the 2017 Texas Retail Rate Case, a request for an increase in non-fuel base revenues. 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 Generating Station ("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 could seek recovery after January 1, 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 allowed 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 allowed 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, which expired on January 9, 2019, with a reconciliation of any over-or under-charge to be addressed in a separate proceeding.
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. The surcharge for the relate back of rates expired on January 9, 2019.
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, was decreased before the Company files its next general 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 Texas 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 TCJA changes and an additional refund of $4.3 million for the amortization of a regulatory liability related to the reduced tax expense for the months of January through March of 2018. 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 is reflected in rates over a period of one year beginning April 1, 2018, and will be updated annually until new base rates are implemented pursuant to the Company's next Texas rate case filing. The PUCT issued an order on December 10, 2018, approving the proposed refund tariff. On February 22, 2019, the Company filed with the PUCT and each of its Texas municipalities an application to modify the tax refund tariff to remove the portion of the base rate credit associated with the $4.3 million of regulatory liability amortization, which expired March 31, 2019. The filing was assigned PUCT Docket No. 49251.
Texas Energy Efficiency Cost Recovery Factor. On May 1, 2017, the Company filed its annual application with the PUCT, 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 with the PUCT, 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 of collections to actual costs for the prior year, 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 a live 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 Administrative Law Judge issued a proposal for decision on November 15, 2018, including the Company's fully requested incentive bonus. On January 17, 2019, the PUCT issued a final order approving a modified bonus amount of $0.9 million.
On May 1, 2019, the Company filed its annual application with the PUCT, which was assigned PUCT Docket No. 49496, to establish its energy efficiency cost recovery factor for 2020. In addition to projected energy efficiency costs for 2020 and a reconciliation of collections to actual costs for the prior year, the Company anticipates requesting an approval for an amount to be determined for the 2018 energy efficiency program results in accordance with PUCT rules. The Company cannot predict the outcome of this filing at this time.
Fuel and Purchased Power Costs. The Company's actual fuel costs, including purchased power energy costs, net of the cost of off-system sales and related shared margins, are recovered from customers through a fixed fuel factor. The PUCT has adopted a fuel cost recovery rule ("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 October 13, 2017, the Company filed a request with the PUCT, 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.
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. The revised factor was approved by the PUCT and the docket closed on November 19, 2018. The Texas fixed fuel factor will continue thereafter until changed by the PUCT. As of March 31, 2019, the Company had a net fuel over-recovery balance of approximately $19.3 million in Texas.
On April 29, 2019, the Company filed a petition with the PUCT, which was assigned PUCT Docket No. 49482, requesting authority to implement, beginning on June 1, 2019, a four-month, interim fuel refund of $19.4 million in fuel cost over-recoveries, including interest, for the period from April 2016 through March 2019. The Company cannot predict the outcome of this filing at this time.
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 provided for the reconciliation of fuel and purchased power costs incurred from April 1, 2013, through March 31, 2016. The financial results for the twelve months ended March 31, 2018, included a $5.0 million, pre-tax increase to income reflecting the settlement of the Texas fuel reconciliation proceeding. This amount represents Palo Verde Generating Station ("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. Additionally, the settlement modified and tightened the Palo Verde performance rewards measurement bands beginning with the 2018 performance period.
The April 1, 2016, through March 31, 2019, Texas jurisdictional fuel and purchased power costs subject to prudence review by the PUCT later this year total approximately $361.5 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 (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 Texas municipalities to expand its community solar program in Texas 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 a hearing was held on December 4, 2018. The Administrative Law Judge issued a proposal for decision on March 19, 2019, that approved the project as proposed by the Company. The Company awaits a final order from the PUCT and cannot predict the outcome of the case at this time.
Transmission Cost Recovery Factor. On January 25, 2019, the Company filed an application with the PUCT to establish its Transmission Cost Recovery Factor ("TCRF"), which was assigned PUCT Docket No. 49148 (the "2019 TCRF rate filing"). The 2019 TCRF rate filing is designed to recover a requested $8.2 million of Texas jurisdictional transmission revenue requirement that is not currently being recovered in the Company's Texas base rates for transmission-related investments placed in service from October 1, 2016, through September 30, 2018, net of retirements. On April 30, 2019, the Company revised the request to $8.1 million to reflect a reclassified item that would likely be included in a future Distribution Cost Recovery Factor ("DCRF") filing. The Company cannot predict the outcome of this filing at this time.
Distribution Cost Recovery Factor. The Company filed an application with the PUCT and each of its Texas municipalities to establish its DCRF on March 28, 2019 (the "2019 DCRF rate filing"). The case was assigned PUCT Docket No. 49395. The 2019 DCRF rate filing is designed to recover a $7.9 million Texas jurisdictional 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. The Company cannot predict the outcome of this filing 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
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. The Company expects to file its New Mexico rate case using a December 31, 2018, historical test year period on July 31, 2019.
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 on 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 the NMPRC 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 ("SPS Appeal No. 1"), challenging the refund as prohibited retroactive ratemaking among other reasons. The New Mexico Supreme 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 NMPRC 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 ("SPS Appeal No. 2"). On February 15, 2019, the NMPRC and SPS filed a joint motion for remand and stipulated dismissal of SPS appeals of NMPRC orders with the New Mexico Supreme Court, which among other things, reflected agreements between the NMPRC and SPS, which in part provide that the NMPRC will replace the order in Case No. 17-00255-UT with a new order that eliminates the retroactive TCJA refund and that SPS will request dismissal of SPS Appeals No. 1 and No. 2. On February 28, 2019, the New Mexico Supreme Court remanded SPS Appeal No. 1 back to the NMPRC and dismissed the appeal. On March 6, 2019, the NMPRC issued a revised final order on remand in Case No. 17-00255-UT that, in part, eliminated the retroactive TCJA refund.
Fuel and Purchased Power Costs. Pursuant to NMPRC Rule 550, fuel and purchased power costs, net of the cost of off-system sales and related shared margins, are reconciled to actual costs on a monthly basis and recovered or refunded to customers the second succeeding month through the Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC"). Additionally, the Renewable Portfolio Standard ("RPS") costs for New Mexico are recovered through a separate RPS Cost Rider that is updated annually. The Company must file an application for continued use of its FPPCAC no more than four years from the date its last FPPCAC was continued. As required, the Company filed a request to continue use of its Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC") with the NMPRC on January 5, 2018, which was assigned Case No. 18-00006-UT. The NMPRC issued a final order in the case on February 13, 2019, which authorized the Company to continue use of its FPPCAC without change and approved the Company's reconciliation of its fuel and purchased power costs for the period January 1, 2015, through December 31, 2016. New Mexico jurisdictional costs subject to prudence review are costs from January 1, 2017, through March 31, 2019, that total approximately $96.4 million. At March 31, 2019, the Company had a net fuel over-recovery balance of approximately $2.5 million related to the FPPCAC in New Mexico.
New Mexico Renewable Portfolio Standard. Effective January 1, 2018, pursuant to the final order in NMPRC Case No. 17-00090-UT, the RPS costs for New Mexico are recovered through a separate RPS Cost Rider and not through the FPPCAC. At March 31, 2019, the Company had a net fuel over-recovery balance related to the RPS Cost Rider of approximately $1.9 million. The RPS Cost Rider is updated in an annual NMPRC filing, including a reconciliation of the prior year’s RPS costs and RPS Cost Rider revenue.
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 with the NMPRC requesting approval of its 2017 Energy Efficiency and Load Management Plan and to establish the Efficient Use of Energy recovery factor ("EUERF") 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. The Company’s EUERF was 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. The Company recorded approved incentives in operating revenues of $0.3 million and $0.7 million in 2018 and 2017, respectively, related to its 2015 through 2017 Energy Efficiency and Load Management Plans.
On July 2, 2018, the Company filed its required application with the NMPRC for approval of its 2019-2021 Energy Efficiency and Load Management Plan and EUERF. 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 hearings were held on November 7, 2018, and November 8, 2018. The Hearing Examiner issued a Recommended Decision on January 30, 2019, and a final order was adopted by the NMPRC, with minor program modifications, on March 6, 2019.
Community Solar. On April 24, 2018, the Company filed an application with the NMPRC to initiate a community solar program in New Mexico 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 would have been on a voluntary basis, and customers would have contracted for a set capacity (kW) amount and would have received 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. The NMPRC set aside its October 31, 2018, order dismissing the application without prejudice, and on December 19, 2018, the NMPRC issued an Order Requiring El Paso Electric Company to Conduct Request for Proposals and to Amend Application; Order Extending Statutory Period and Appointing Hearing Examiner that would have required the Company to amend its initially-filed application on or before February 15, 2019. However, on January 10, 2019, the NMPRC with three new Commissioners reconsidered its prior order and dismissed the Community Solar application without prejudice. The case is now closed.
Integrated Resource Plan. On September 17, 2018, the Company filed its Integrated Resource Plan with the NMPRC for the period 2018-2037 ("2018 IRP") 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. NMPRC Staff filed a written report on November 16, 2018, recommending that the NMPRC return the 2018 IRP to the Company with instructions for re-filing to correct 12 deficiencies identified by the NMPRC Staff report. On December 5, 2018, the NMPRC issued an Order Partially Accepting Integrated Resource Plan; Order Requiring Refiling for Deficiencies. Pursuant to that order, on January 3, 2019, the Company filed an amended 2018 IRP. On January 10, 2019, in light of a pending motion for reconsideration, the NMPRC ordered its Staff to provide additional information and respond to issues raised regarding the filed 2018 IRP. On March 15, 2019, NMPRC Staff filed the additional response and recommended that the Company correct one deficiency identified. The Company is awaiting action by the NMPRC on the Staff recommendation. 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 ("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 issued $65.0 million in aggregate principal amount of 4.07% Senior Guaranteed Notes due August 15, 2025. 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 ("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 ("PCBs") and the $37.1 million 2009 Series B 7.25% PCBs, 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.
On January 30, 2019, the Company submitted an application with the NMPRC seeking approval to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. The application was assigned Case No. 19-00033-UT, and the NMPRC issued a final order approving the Company's request on March 27, 2019. Additionally, the Company is preparing for potential transactions related to the 2009 Series A 7.25% PCBs and 2009 Series B 7.25% PCBs. On February 1, 2019, and April 1, 2019, the Company purchased in lieu of redemption all the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs, respectively. The bonds were purchased utilizing funds borrowed under the RCF. The Company is currently holding the bonds and may remarket them or replace them with debt instruments of equivalent value at a future date depending on the Company's financing needs and market conditions. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for further discussion.
Amendments to the New Mexico Renewable Energy Act (“REA”). The REA requires electric utilities to meet a renewable portfolio standard (“RPS”) of twenty percent of its total retail sales to New Mexico customers by 2020, reduced for sales to qualifying large non-governmental customers whose costs are capped under the REA (“Large Customer Adjustment”) and subject to a reasonable cost threshold (“RCT”) established by the NMPRC and currently set by the NMPRC at 3 percent of customers’ bills. Effective June 14, 2019, the New Mexico Energy Transition Act amends the REA (the “Amended REA”) to, among other amendments: (i) increase the RPS to forty percent by 2025, fifty percent by 2030, and eighty percent by 2040; (ii) impose a zero-carbon standard by 2045; (iii) eliminate the Large Customer Adjustment; (iv) set a statutory RCT; and (v) provide cost recovery for certain undepreciated investments and decommissioning costs (i.e., coal-fired generation) associated with generation required by the NMPRC to be discontinued and replaced with lower or zero-carbon generation. In administering the eighty percent RPS and zero-carbon standards, the Amended REA requires by Commission to consider certain factors, including safety, reliability and rate impact to customers. The NMPRC has not docketed a rulemaking proceeding to implement the Amended REA. Under current NMPRC rules, the Company is required to file its next annual REA procurement plan case on May 1, 2019. On April 24, 2019, in NMPRC Case No. 19-00099-UT, the NMPRC granted the Company a variance authorizing the Company to file its next annual REA procurement plan case on October 1, 2019. The Company cannot predict the outcome of the filing at this time.
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 ("Show Cause Proceeding"). 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 prepare 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. On November 15, 2018, FERC issued an order finding that the Company had demonstrated that no rate reduction was justified and terminating the Show Cause Proceeding. The Company expects to file its request for approval to revise OATT rates in the third quarter of 2019.
Notice of Proposed Rulemaking on Public Utility Transmission Changes to Address Accumulated Deferred Income Taxes. On November 15, 2018, the FERC issued a Notice of Proposed Rulemaking ("NOPR") that proposes to direct public utilities with transmission OATT rates, a transmission owner tariff or a rate schedule to determine the amount of excess or deficient accumulated deferred income taxes caused by the TCJA’s reduction to the federal corporate income tax rate and return or recover this amount to or from customers. The NOPR has been assigned FERC Docket No. RM19-5-000. The Company is currently evaluating the impact of this proposed rulemaking.
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, refinance, and/or replace the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs, 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 issued $65.0 million in aggregate principal amount of its 4.07% Senior Guaranteed Notes due August 15, 2025. Also, 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. Additionally, the Company is preparing for potential transactions related to the 2009 Series A 7.25% PCBs and 2009 Series B 7.25% PCBs. On February 1, 2019, and April 1, 2019, the Company purchased in lieu of redemption all the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs, respectively. The bonds were purchased utilizing funds borrowed under the RCF. The Company is currently holding the bonds and may remarket them or replace
them with debt instruments of equivalent value at a future date depending on the Company's financing needs and market conditions and in accordance with FERC action in response to the Company’s most recent FERC application (see below).
On January 30, 2019, the Company submitted an application with the FERC seeking approval to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. Included in the FERC application, the Company also requested various debt-related authorizations: approval to utilize the existing RCF for short-term borrowing not to exceed $400.0 million at any one time; to issue up to $225.0 million in new long-term debt; and to remarket the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs in the form of replacement bonds or senior notes of equivalent value, not to exceed $100.6 million. On April 18, 2019, the FERC issued an order authorizing the issuances through April 18, 2021. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for further discussion.
Other Required Approvals. The Company has obtained required approvals for rates, tariffs and other approvals as required by the Federal Power Act and the FERC.
E. Palo Verde
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"). The settlement agreement, as amended, provides APS with a method for submitting claims and receiving recovery for costs incurred through December 31, 2016, which has been extended to December 31, 2019.
On October 31, 2018, APS filed a $10.2 million claim for the period July 1, 2017 through June 30, 2018. The Company's share of this claim is approximately $1.6 million. The DOE approved the claim on April 10, 2019. Any reimbursement is anticipated to be received in the second quarter of 2019, and the majority of the reimbursement received by the Company is expected to be credited to customers through the applicable fuel adjustment clauses.
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 $14.7 million and $13.6 million in quarterly cash dividends during the three months ended March 31, 2019 and 2018, respectively. The Company paid a total of $58.6 million and $54.3 million in quarterly cash dividends during the twelve months ended March 31, 2019 and 2018, respectively.
Basic and Diluted Earnings Per Share. The basic and diluted earnings per share are presented below (in thousands except for share data):
Three Months Ended March 31,
Twelve Months Ended March 31,
2019
2018
2019
2018
Weighted average number of common shares outstanding:
Basic number of common shares outstanding
40,582,936
40,491,194
40,543,986
40,440,189
Dilutive effect of unvested performance awards
80,817
—
117,242
123,436
Diluted number of common shares outstanding
40,663,753
40,491,194
40,661,228
40,563,625
Basic net income (loss) per common share:
Net income (loss)
$
6,089
$
(6,966
)
$
97,370
$
95,285
Income allocated to participating restricted stock
(47
)
(48
)
(340
)
(353
)
Net income (loss) available to common shareholders
$
6,042
$
(7,014
)
$
97,030
$
94,932
Diluted net income (loss) per common share:
Net income (loss)
$
6,089
$
(6,966
)
$
97,370
$
95,285
Income reallocated to participating restricted stock
(47
)
(48
)
(339
)
(353
)
Net income (loss) available to common shareholders
$
6,042
$
(7,014
)
$
97,031
$
94,932
Basic net income (loss) per common share:
Distributed earnings
$
0.36
$
0.335
$
1.44
$
1.34
Undistributed earnings (losses)
(0.21
)
(0.505
)
0.95
1.01
Basic net income (loss) per common share
$
0.15
$
(0.170
)
$
2.39
$
2.35
Diluted net income (loss) per common share:
Distributed earnings
$
0.36
$
0.335
$
1.44
$
1.34
Undistributed earnings (losses)
(0.21
)
(0.505
)
0.95
1.00
Diluted net income (loss) per common share
$
0.15
$
(0.170
)
$
2.39
$
2.34
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
Twelve Months Ended
March 31,
March 31,
2019
2018
2019
2018
Restricted stock awards
62,605
72,218
60,432
66,288
Performance shares (a)
43,652
45,977
22,234
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.
On January 30, 2019, the Company submitted an application with both the NMPRC and the FERC seeking approval to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. The Company received final approvals from the NMPRC and the FERC on March 27, 2019 and April 18, 2019, respectively.
G. Income Taxes
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 2014.
For the three months ended March 31, 2019 and 2018, the Company’s effective tax rate was 23.8% and 30.5%, respectively. For the twelve months ended March 31, 2019 and 2018, the Company's effective tax rate was 24.3% and 34.5%, respectively. The federal statutory tax rate is 21% in 2019 and in 2018, and 35.0% in 2017. The Company's effective tax rate for the three months ended March 31, 2019 differs from the Company's effective tax rate for the three months ended March 31, 2018 due to lower values of stock incentives vested and other permanent differences. The Company's effective tax rate for the twelve months ended March 31, 2019 differs from the Company's effective tax rate for the twelve months ended March 31, 2018 due to the change in the federal income tax rate partially offset by an increase in state tax reserves and other permanent differences.
H. Commitments, Contingencies and Uncertainties
For a full discussion of commitments and contingencies, see Part II, Item 8, Financial Statements and Supplementary Data, Note L of the Notes to Financial Statements in the 2018 Form 10-K. In addition, see Part I, Item 1, Financial Statements, Notes D and E of Notes to Financial Statements above and Part II, Item 8, Financial Statements and Supplementary Data, Notes D and F of the Notes to Financial Statements in the 2018 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 its RPS requirements, 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 RPS requirements. For a discussion of power purchase and sale contracts that the Company has entered into with various counterparties, see Part II, Item 8, Financial Statements and Supplementary Data, Note L of the Notes to Financial Statements in the 2018 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.
The Company’s lease population is composed of operating leases. The Company leases land in El Paso, Texas, adjacent to Newman under a lease that expires in June 2033 with a renewal option of 25 years. The Company also has several other leases for offices, parking facilities and equipment that expire within the next 5 years. The Company has transmission and distribution lines that are operated under various land rights agreements, including easements, leases, permits and franchises. The components of lease expense are as follows:
Three Months Ended March 31, 2019
Lease cost (in thousands):
Operating lease cost
$
253
Short-term lease cost
274
Variable lease cost
34
Total lease cost
$
561
Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
March 31, 2019
Operating leases:
Operating lease ROU assets (included in electric plant in service)
$
6,217
Operating lease liabilities (current included in other current liabilities)
552
Operating lease liabilities (net of current included in deferred credits and other liabilities)
5,336
Total lease liabilities
$
5,888
Weighted average remaining lease terms (in years)
12.22
Weighted average discount rate
4.63
%
Supplemental cash flow information related to leases was as follows (in thousands):
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases
$
557
ROU assets obtained in exchange for lease obligations (in thousands):
Maturities of operating lease liabilities at March 31, 2019 were as follows (in thousands):
Year ending December 31,
2019
$
306
2020
770
2021
696
2022
639
2023
590
Thereafter
4,829
Total lease payments
7,830
Less imputed interest
(1,942
)
Total
$
5,888
Disclosures related to periods prior to adoption of the new lease standard
The Company’s total rental expense related to operating leases was $1.7 million and $2.4 million for the twelve months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, the Company’s minimum future rental payments for the next five years were as follows (in thousands):
Year ending December 31,
2019
$
923
2020
820
2021
700
2022
544
2023
526
J. 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 Part I, Item 1, Financial Statements, Notes D and H of Notes to Financial Statements above and Part II, Item 8, Financial Statements and Supplementary Data, Notes D and L of the Notes to Financial Statements in the 2018 Form 10-K for discussion of the effects of government legislation and regulation on the Company.
The expected return on plan assets is included in "Investment and interest income, net" in the Company's Statements of Operations. 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".
Retirement Plans
The net periodic benefit cost recognized for the three and twelve months ended March 31, 2019 and 2018, is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):
Three Months Ended
Twelve Months Ended
March 31,
March 31,
2019
2018
2019
2018
Components of net periodic benefit cost:
Service cost
$
2,488
$
2,758
$
10,818
$
9,006
Interest cost
3,608
3,223
13,263
13,034
Expected return on plan assets
(5,383
)
(5,315
)
(21,144
)
(19,696
)
Amortization of:
Net loss
1,418
2,100
7,871
8,465
Prior service benefit
(878
)
(878
)
(3,506
)
(3,506
)
Net periodic benefit cost
$
1,253
$
1,888
$
7,302
$
7,303
During the three months ended March 31, 2019, the Company contributed $3.0 million of its projected $9.5 million 2019 annual contribution to its retirement plans.
Other Postretirement Benefits
The net periodic benefit recognized for the three and twelve months ended March 31, 2019 and 2018, is made up of the components listed below (in thousands):