El Paso Electric Announces First Quarter 2020 Financial Results

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

Overview

Generally Accepted Accounting Principles (“GAAP”) Financial Measures

• For the first quarter of 2020, El Paso Electric Company (“EE” or the “Company”) reported net loss of $35.2 million, or $0.87 basic and diluted loss per share. In the first quarter of 2019, EE reported net income of $6.1 million, or $0.15 basic and diluted earnings per share.

Non-GAAP Financial Measures

• For the first quarter of 2020, EE reported adjusted net loss of $8.7 million, or $0.21 adjusted basic loss per share. In the first quarter of 2019, EE reported adjusted net loss of $6.7 million, or $0.17 adjusted basic loss per share.

Adjusted net loss and adjusted basic loss per share, both non-GAAP financial measures, exclude the impact of changes in the fair value of equity securities and realized gains (losses) from the sale of both equity and fixed income securities in the Company’s Palo Verde nuclear decommissioning trust funds (“NDT”). Refer to “Use of Non-GAAP Financial Measures” for a reconciliation of adjusted net loss and adjusted basic loss per share (non-GAAP financial measures) to Net income (loss) and Basic earnings (loss) per share, the most directly comparable GAAP financial measures, respectively.

“The COVID-19 pandemic has altered the daily lives of virtually everyone worldwide, including the individuals living and working in the communities we serve. Our hardworking employees and the Company remain committed to providing safe and reliable energy to each of our customers,” said Adrian J. Rodriguez, Interim Chief Executive Officer. “In early March we implemented our business continuity plan, focusing on the safety of our employees, customers, contractors, and vendors while continuing to meet the needs of our community and assessing the effects the pandemic could have on our operations and financial condition. At the same time, we continue to complete the regulatory approval process associated with the Infrastructure Investments Fund’s pending acquisition of El Paso Electric and anticipate closing the transaction in the second quarter of 2020.”

Summary Results

The table and explanations below are presented on a GAAP basis and indicate the major factors affecting the net loss during the three months ended March 31, 2020, relative to net income during the three months ended March 31, 2019 (in thousands except Basic EPS data):

First Quarter of 2020

Net income (loss) for the three months ended March 31, 2020, when compared to the three months ended March 31, 2019, was negatively affected by (presented on a pre-tax basis):

• Decreased investment and interest income primarily due to net realized and unrealized losses of $33.2 million for the three months ended March 31, 2020, compared to net gains of $16.0 million for the three months ended March 31, 2019, on securities held in the Company’s Palo Verde nuclear decommissioning trust funds (“NDT”). These market losses experienced by the Company were in line with declines reported in the financial markets worldwide and were largely attributable to the growing impact of the Novel Coronavirus (“COVID-19”) pandemic. Refer to “Use of Non-GAAP Financial Measures” for further details.
• Increased operations and maintenance (“O&M”) expenses related to the Company’s fossil-fuel generating plants primarily due to increased maintenance costs at Newman Power Station (“Newman”) and increased outage costs at Newman Unit 5. These increases were partially offset by decreased outage costs at Newman Unit 4.
• Strategic transaction costs of $1.3 million incurred in connection with the merger between the Company and an affiliate of the Infrastructure Investments Fund, an investment vehicle advised by J.P. Morgan Investment Management Inc. (“IIF”). Refer to “Agreement and Plan of Merger” below for further details.

• Increased depreciation and amortization due to increased plant balances.

Net income (loss) for the three months ended March 31, 2020, when compared to the three months ended March 31, 2019, was positively affected by (presented on a pre-tax basis):

• Increased retail non-fuel base revenues primarily due to a $1.8 million increase in revenues related to the Transmission Cost Recovery Factor (“TCRF”) Settlement Agreement approved by the Public Utility Commission of Texas (“PUCT”) on December 16, 2019, and a $1.7 million increase related to the Distribution Cost Recovery Factor (“DCRF”) approved by the PUCT on September 27, 2019. Excluding the impact of rate changes, retail non-fuel base revenues decreased $2.8 million primarily due to decreased revenues from (i) sales to public authorities of $1.1 million caused by a 0.2% decrease in kilowatt-hour (“kWh”) sales, (ii) small commercial and industrial customers of $0.8 million caused by a 2.0% decrease in kWh sales, and (iii) large commercial and industrial customers of $0.5 million. Heating degree days decreased 4.9% in the three months ended March 31, 2020, when compared to the three months ended March 31, 2019. Non-fuel base revenues and kWh sales for the three months ended March 31, 2020, are provided by customer class under table titled “Sales and Revenues Statistics (Unaudited)” of this news release. Refer to “Texas Regulatory Matters” for further details.

COVID-19 Pandemic

As widely reported, the spread of COVID-19 has migrated from predominately a regional concern in China in December 2019, to a global epidemic, which the World Health Organization declared a pandemic on March 11, 2020. As of the date of this news release, the Company is operating in a modified work environment. Employees have been directed to perform their work duties from home except those who have responsibilities essential to servicing the Company’s customers and that require them to be on site. These employees are working under additional precautionary measures designed to mitigate the transmission of the virus. The Company is also working closely with community leaders to monitor the situation and to continue to provide safe, clean, reliable and cost-effective energy to its customers. The COVID-19 pandemic continues to rapidly evolve, and therefore the Company cannot predict the duration of the COVID-19 pandemic and its impact on the overall economy, including the impact that it will have on the Company’s financial condition, results of operations and cash flows. Refer to “Capital and Liquidity” for further details.

Agreement and Plan of Merger

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

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

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

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

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

On August 13, 2019, the Company, Parent and IIF US Holding 2 LP, an affiliate of IIF, as applicable, filed (i) the joint report and application for regulatory approvals with the PUCT requesting approval of the Merger pursuant to the Texas Public Utility Regulatory Act, which was assigned PUCT Docket No. 49849, (ii) the joint application for regulatory approvals with the New Mexico Public Regulation Commission (“NMPRC”) requesting approval of the Merger pursuant to the New Mexico Public Utility Act and NMPRC Rule 450, which was assigned NMPRC Case No. 19-00234-UT, (iii) the joint application requesting approval of the Merger with the Federal Energy Regulatory Commission (“FERC”) under Section 203 of the Federal Power Act, which was assigned FERC Docket No. EC19-120-000, and (iv) the joint application for regulatory approval for the indirect transfer of the Company’s Nuclear Regulatory Commission (“NRC”) licenses to Parent from the NRC under the Atomic Energy Act of 1954, which was assigned Docket ID NRC-2019-0214. In addition, on August 13, 2019, the Company and Parent sought the authorization of the Federal Communications Commission (“FCC”) to assign or transfer control of the Company’s FCC licenses under FCC File No. 008737430. On December 4, 2019, the Company and Parent received consent from the FCC to transfer the Company’s FCC licenses.

On August 16, 2019, the Company and Parent filed the notification and report form with the Antitrust Division of the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), which was assigned Transaction Identification No. 2019 1858. On September 3, 2019, the Company and Parent received notice from the FTC granting early termination of the waiting period under the HSR Act.

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

Under the Merger Agreement, the consent to the Merger by the City of El Paso under its franchise agreement with the Company is a condition to the closing of the Merger. Under the franchise agreement, if the City of El Paso does not grant its consent to the Merger, the franchise agreement would terminate upon the closing of the Merger. On September 20, 2019, the Company submitted the Franchise Agreement Assignment Application to the City of El Paso to receive the City’s consent to the Merger. On February 4, 2020, the City of El Paso passed Ordinance No. 019022 approving the Franchise Agreement Assignment Application and granting the City of El Paso’s consent to the Merger.

On January 16, 2020, the PUCT approved the Merger and issued its final order on January 28, 2020. On March 6, 2020, the NRC’s staff approved the joint application for the indirect transfer of control of the Company’s ownership in Palo Verde to IIF. A final order approving the Merger was issued by the NMPRC on March 11, 2020.

On December 5, 2019, the FERC requested additional information regarding the parties to the Merger. On January 6, 2020, the Company and IIF filed a joint response to the FERC’s inquiry. On January 17, 2020, the Company and IIF filed a second supplement to the application. The FERC established a January 27, 2020 deadline date for comments on the filings. Several motions to intervene were filed, along with a protest of the January 6, 2020 response. On February 6, 2020, the Company and IIF filed a reply to the January 27, 2020 protest. On March 30, 2020, the FERC issued an order authorizing the Merger, subject to the FERC’s approval of mitigation to address certain discrete competitive effects of the Merger that could arise. The FERC concluded that the Merger, as conditioned, satisfies governing federal standards and authorized the Merger as consistent with the public interest. The FERC required that the proposed mitigation be filed within 45 days of the issuance of the FERC Order. On April 15, 2020, the Company and IIF filed proposed mitigation options with the FERC. The matter is pending final approval from the FERC.

The FERC’s final approval is the last regulatory approval needed to close the Merger. The Company anticipates that the closing of the Merger will occur in the second quarter of 2020, upon the FERC’s approval of the required mitigation and satisfaction or waiver of the other Merger Agreement closing conditions.

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

Regulatory Matters

Texas Regulatory Matters

Transmission Cost Recovery Factor. On January 25, 2019, the Company filed an application with the PUCT to establish its TCRF, which was assigned PUCT Docket No. 49148 (the “2019 TCRF rate filing”). The 2019 TCRF rate filing was designed to recover a requested $8.2 million of Texas jurisdictional transmission revenue requirement that was not being recovered in the Company’s Texas base rates for transmission-related investments placed in service from October 1, 2016, through September 30, 2018, net of retirements. On September 12, 2019, the Company filed an unopposed settlement agreement and proposed order for a TCRF revenue requirement of $7.5 million with a provision for recovery of revenue relating to the period from July 30, 2019 to December 31, 2019. Such revenue through December 31, 2019, approximated $3.0 million. On December 16, 2019, the PUCT issued a final order approving the settlement agreement, and the Company’s TCRF rates became effective in customer bills beginning January 1, 2020. On January 14, 2020, the Company filed with the PUCT a proposed surcharge in compliance with the final order issued in PUCT Docket No. 49148 for recovery of the $3.0 million related to 2019, over a period of 12 months beginning on April 1, 2020. The filing was assigned PUCT Docket No. 50256, and on February 7, 2020, the surcharge was approved through delegated authority by a Commission Administrative Law Judge.

Distribution Cost Recovery Factor. On March 28, 2019, the Company filed an application with the PUCT and each of its Texas municipalities to establish its DCRF, which was assigned PUCT Docket No. 49395 (the “2019 DCRF rate filing”). The 2019 DCRF rate filing was designed to recover a requested $7.9 million of Texas jurisdictional distribution revenue requirement that was not being recovered in the Company’s Texas base rates for distribution-related investments placed in service from October 1, 2016, through December 31, 2018, net of retirements. On August 13, 2019, the Company filed an unopposed settlement agreement and proposed order which resolved all issues in the proceeding and approved a DCRF revenue requirement of $7.8 million. On September 27, 2019, the PUCT issued a final order approving the settlement agreement, and the Company’s DCRF rates became effective in customer bills beginning October 1, 2019.

New Mexico Regulatory Matters

The Company was required to file its next New Mexico base rate case no later than July 31, 2019. On July 10, 2019, the NMPRC issued an order approving a joint request by the Company, NMPRC staff, and the New Mexico Attorney General to delay filing of the Company’s next base rate case until after the conclusion of a proceeding addressing the Merger. The NMPRC order requires the Company to file its next rate case application within three months of the final disposition of the proceeding addressing the Merger in New Mexico. A final order approving the Merger was issued by the NMPRC on March 11, 2020.

Use of Non-GAAP Financial Measures

As required by ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, changes in the fair value of equity securities are recognized in the Company’s Statements of Operations. This standard added the potential for significant volatility to the Company’s reported results of operations as changes in the fair value of equity securities may occur. Furthermore, the equity investments included in the NDT are significant and are expected to increase significantly during the remaining life (estimated to be 25 to 28 years) of the Palo Verde Generating Station (“Palo Verde”). Accordingly, the Company has provided the following non-GAAP financial measures to exclude the impact of changes in fair value of equity securities and realized gains (losses) from the sale of both equity and fixed income securities. Reconciliations of both non-GAAP financial measures to the most directly comparable financial information presented in accordance with GAAP are presented in the table below. Non-GAAP adjusted net loss is reconciled to GAAP net income (loss), and non-GAAP adjusted basic loss per share is reconciled to GAAP basic earnings (loss) per share.

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

Capital and Liquidity

At March 31, 2020, our capital structure, including common stock equity, long-term debt, and short-term borrowings under our revolving credit facility (“RCF”), consisted of 41.7% common stock equity and 58.3% debt. At March 31, 2020, we had a balance of $57.4 million in cash and cash equivalents. As a precautionary measure in response to the growing COVID-19 pandemic and potential economic turmoil, on March 13, 2020, we borrowed $50.0 million under our RCF to increase the Company’s cash position, and maintain financial flexibility. Additionally, on March 20, 2020, we increased the borrowing commitments under our RCF by $50.0 million to $400.0 million, which increased our total available liquidity to $159.0 million at March 31, 2020. Based on current projections, we believe that we will have adequate liquidity through our current cash balances, cash from operations, available borrowings under the RCF and, if necessary, debt issuances in the capital markets or, after the closing of the Merger, an equity contribution from the Parent, to meet all of our anticipated cash requirements for the next twelve months including the maturity of $45.0 million aggregate principal amount of our Series C 5.04% Senior Notes due August 2020. Pursuant to the Merger Agreement, the Company can incur additional indebtedness up to $200.0 million (excluding borrowings up to the borrowing capacity of the RCF) prior to the closing of the Merger, without written consent from the Parent; however, we cannot issue shares of common stock, subject to certain limited exceptions, without the prior written consent of Parent. As discussed below, we have the necessary regulatory approvals to issue long-term debt and equity in the capital markets.

We expect to continue to maintain a prudent level of liquidity and monitor market conditions for debt and equity securities. Our liquidity needs can fluctuate quickly based on fuel prices and other factors and we are continuing to make investments in new electric plant and other assets in order to reliably serve our customers.

We believe we have adequate liquidity to meet our capital requirements over the next twelve months; however, the duration (which remains uncertain) and severity of the COVID-19 pandemic could extend disruptions to supply chains and capital markets, reduce labor availability and productivity, and cause a reduction in economic activity despite our efforts to manage these impacts.

Cash (used for) or provided from operations for the three months ended March 31, 2020, was $(1.5) million, compared to $26.4 million for the three months ended March 31, 2019. A component of cash flows from operations is the change in net over-collection and under-collection of fuel revenues. The difference between fuel revenues collected and fuel expense incurred is deferred to be either refunded (over-recoveries) or surcharged (under-recoveries) to customers in the future. During the three months ended March 31, 2020, we had fuel under-recoveries of $6.2 million compared to over-recoveries of fuel costs of $12.8 million during the three months ended March 31, 2019. At March 31, 2020, we had a net fuel over-recovery balance of $12.

Contacts

Media Contacts
Eddie Gutierrez

915.543.5763

eduardo.gutierrez@epelectric.com

Investor Relations
Lisa Budtke

915.543.5947

lisa.budtke@epelectric.com

Read full story here