El Paso Electric Announces Third Quarter 2016 Financial Results

El Paso Electric Company (NYSE:EE):

Overview
  • For the third quarter of 2016, El Paso Electric Company ("EE" or the "Company") reported net income of $74.6 million, or $1.84 basic and diluted earnings per share. In the third quarter of 2015, EE reported net income of $56.7 million, or $1.40 basic and diluted earnings per share.
  • For the nine months ended September 30, 2016, EE reported net income of $91.1 million, or $2.25 basic and diluted earnings per share. Net income for the nine months ended September 30, 2015 was $81.3 million, or $2.01 basic and diluted earnings per share.

"The third quarter of 2016 was a pivotal quarter for the Company. We completed our more than $1.4 billion construction program, as we put the last unit of the Montana Power Station into commercial operation. We also received rate relief in Texas and New Mexico for Montana Units 1 and 2 and other plant added in the first phase of that program," said Mary Kipp, Chief Executive Officer. "The August 25, 2016 final order from the Public Utility Commission of Texas approving an unopposed settlement allowed us to retroactively recognize revenues back to January 12, 2016. Also during the third quarter of 2016, we completed the sale of Four Corners, which means the Company no longer owns any coal-fired generation. Looking ahead, we anticipate filing new rate cases in Texas and New Mexico in the first half of 2017, primarily for the recovery of costs associated with the second phase of our construction program, including Montana Units 3 and 4, which are helping meet continued customer growth."

Earnings Summary

The table and explanations below present the major factors affecting 2016 net income relative to 2015 net income (in thousands except per share data):
    Quarter Ended       Nine Months Ended

Pre-Tax Effect
   

After-Tax Effect
   

Basic EPS
Pre-Tax Effect     After-Tax Effect    

Basic EPS
September 30, 2015 $ 56,740 $ 1.40 $ 81,270 $ 2.01
Changes in:
Retail non-fuel base revenues $ 32,544 21,153 0.52 $ 36,568 23,769 0.59
Depreciation and amortization 6,428 4,179 0.10 3,983 2,589 0.06
Other revenues 1,275 829 0.02 714 464 0.01
O&M at fossil-fuel generating plants 1,074 698 0.02 (2,029 ) (1,319 ) (0.03 )
Changes in the effective tax rate (5,288 ) (0.13 ) (5,952 ) (0.15 )
Investment and interest income (2,139 ) (1,719 ) (0.04 ) (2,271 ) (1,804 ) (0.04 )
Interest on long-term debt (1,859 ) (1,209 ) (0.03 ) (3,778 )

(2,455
) (0.06 )
Allowance for funds used during construction (698 ) (619 ) (0.02 ) (3,751 ) (3,330 ) (0.08 )
Taxes other than income taxes (912 ) (592 ) (0.01 ) (1,453 ) (944 ) (0.02 )
Other 717   464     0.01   (1,807 )   (1,176 )   (0.04 )
September 30, 2016 $ 74,636   $ 1.84   $ 91,112   $ 2.25  
 

Financial Effect of the Public Utility Commission of Texas ("PUCT") Final Order

On August 25, 2016, the PUCT issued its final order in the Company's rate case in Docket No. 44941 (the "PUCT Final Order") approving the Joint Motion to Implement Uncontested Amended and Restated Stipulation and Agreement (the "Unopposed Settlement") (See " 2015 Texas Retail Case Filing" for a discussion of the PUCT Final Order). Given the uncertainties regarding the ultimate resolution of the case, the Company did not recognize the financial effects of the Unopposed Settlement in the Company's Statement of Operations prior to the issuance of the PUCT Final Order. The increase in net income resulting from the PUCT Final Order was approximately $23.3 million or $0.58 per basic earnings per share. Approximately $10.7 million, after tax, of this impact relates to the period from July 1, 2016 through September 30, 2016 and approximately $12.6 million, after tax, relates to the period from January 12, 2016 through June 30, 2016.

Regulatory Lag

The Company completed construction of Montana Power Station ("MPS") Units 3 and 4 and placed them into service on May 3, 2016 and September 15, 2016, respectively. The placement of these assets into service are having and will continue to have a negative impact on the Company's 2016 and 2017 financial results until new rates are effective due to the regulatory lag associated with the recovery of related costs. The primary impacts from these assets being placed in service include a reduction in amounts capitalized for allowance for funds used during construction ("AFUDC"), and increases in depreciation, operations and maintenance ("O&M") expense, property taxes and interest cost. The Company anticipates filing new rate cases in Texas and New Mexico in the first half of 2017 to reflect MPS Units 3 and 4 in rate base.

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