NOTES TO FINANCIAL STATEMENTS
(Unaudited)
A. Principles of Preparation
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, 2015
(the "
2015
Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the
2015
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, 2016
and
December 31, 2015
; the results of its operations and comprehensive operations for the
three and twelve months ended
March 31, 2016
and
2015
; and its cash flows for the
three months ended
March 31, 2016
and
2015
. The results of operations and comprehensive operations for the
three
months ended
March 31, 2016
and the cash flows for the
three months ended
March 31, 2016
are not necessarily indicative of the results to be expected for the full calendar year.
Pursuant to the rules and regulations of the Securities and Exchange Commission (the "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 generally accepted accounting principles.
Use of Estimates
. The preparation of financial statements in conformity with generally accepted accounting principles 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.
Revenues
. Revenues related to the sale of electricity are generally recorded when service is provided or electricity is delivered to customers. The billing of electricity sales to retail customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. Unbilled revenues are recorded for estimated amounts of energy delivered in the period following the customers billing cycle to the end of the month. Unbilled revenues are estimated based on monthly generation volumes and by applying an average revenue/kWh to the number of estimated kWhs delivered but not billed. Accounts receivable included accrued unbilled revenues of
$17.9 million
at
March 31, 2016
and
$21.7 million
at
December 31, 2015
. The Company presents revenues net of sales taxes in its statements of operations.
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosures (in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Cash paid (received) for:
|
|
|
|
|
Interest on long-term debt and borrowings under the revolving credit facility
|
$
|
10,666
|
|
|
$
|
10,117
|
|
|
Income tax paid (refunded), net
|
66
|
|
|
(807
|
)
|
Non-cash investing and financing activities:
|
|
|
|
|
Changes in accrued plant additions
|
(5,882
|
)
|
|
(5,207
|
)
|
|
Grants of restricted shares of common stock
|
653
|
|
|
523
|
|
New Accounting Standards.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 715) to simplify the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30), to provide further clarification to ASU 2015-03 as it relates to the presentation and subsequent measurement of debt issuance costs associated with line of credit arrangements.
The Company
implemented ASU 2015-03 and ASU 2015-15 in the first quarter of 2016, retrospectively to all prior
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
periods presented in
the Company's
financial statements. The implementation of ASU 2015-03 did not have a material impact on
the Company's
results of operations.
See Note J.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820) to eliminate the requirement to categorize investments in the fair value hierarchy if the fair value is measured at net asset value ("NAV") per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement gui
dance
. Reporting entities must still provide sufficient information to enable users to reconcile total investments in the fair value hierarchy and total investments measured at fair value in the financial statements. Additionally, the scope of current disclosure requirements for investments eligible to be measured at NAV will be limited to investments to which the practical expedient is applied. This ASU is effective in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The ASU requires retrospective application.
The Company
implemented ASU 2015-07 in the first quarter of 2016, retrospectively to all prior periods presented in
the Company's
fair value disclosures. This guidance required a revision of the fair value disclosures but did not impact
the Company's
financial statements. The implementation of ASU 2015-07 did not have a material impact on
the Company's
results of operations.
See Note J.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 can be applied prospectively or retrospectively and is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted
. The Company
elected to early adopt ASU 2015-17 retrospectively in the first quarter of 2016. The implementation of ASU 2015-17 did not have a material impact on
the Company's
results of operations.
See Note F.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) to provide a framework that replaces the existing revenue recognition guidance. ASU 2014-09 is the result of a joint effort by the FASB and the International Accounting Standards Board intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. Generally Accepted Accounting Principles ("GAAP") and International Financial Reporting Standards. ASU 2014-09 provides that an entity should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 was originally intended to be effective for annual periods and interim periods within that reporting period beginning after December 15, 2016, for public business entities. In August 2015, FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 for all entities by one year. Public business entities will apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods within that reporting period. In March 2016, the FASB issued ASU 2016-08 to clarify the implementation guidance on principal versus agent consideration. In April 2016, the FASB issued ASU 2016-10 to clarify the implementation guidance on identifying performance obligations and licensing. Early adoption of ASU 2014-09 is permitted after December 15, 2016. The Company has not selected a transition method and is currently assessing the future impact of this ASU.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities to enhance the reporting model for financial instruments by addressing certain aspects of recognition, measurement, presentation, and disclosure. ASU 2016-01 requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The guidance for classifying and measuring investments in debt securities and loans are not changed by this ASU, but requires entities to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. Financial assets and financial liabilities must be separately presented by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. ASU 2016-01 clarifies the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The standard includes a requirement that businesses must report changes in the fair value of their own liabilities in other comprehensive income instead of earnings, and this is the only provision of the update for which the FASB is permitting early adoption. The remaining provisions of this ASU become effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company is
currently assessing the future impact of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring qualitative and quantitative disclosures on leasing agreements. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous leases guidance for capital leases and operating leases. The impact of leases reported in the Company's operating results and statement of cash flows are expected to be similar to previous GAAP. ASU 2016-02 requires the recognition in the statement of financial position, by the lessee, of a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. How leases are recorded in regard to financial position
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
represents a significant change from previous GAAP. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. Implementation of the standard for public companies will be required for annual reporting periods beginning after December 15, 2018 and interim periods within that reporting period. Early adoption of ASU 2016-02 is permitted for all entities. Adoption of the new lease accounting standard will require
the Company
to apply the new standard to the earliest period using a modified retrospective approach.
The Company is
currently assessing the future impact of this ASU.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards either as equity or liabilities, and classification on the statements of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted.
The Company is
currently assessing the future impact of this ASU.
Reclassification.
Certain amounts in the financial statements for 2015 have been reclassified to conform with the 2016 presentation. The Company implemented ASU 2015-03 and ASU 2015-17 in the first quarter of 2016, retrospectively to all periods presented in the Company's financial statements. See Note J and Note F, respectively.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
B. Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Accumulated Other Comprehensive Income (Loss) (net of tax) by component are presented below (in thousands):
|
|
|
|
Three Months Ended March 31, 2016
|
|
Three Months Ended March 31, 2015
|
|
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(29,869
|
)
|
|
$
|
27,765
|
|
|
$
|
(11,810
|
)
|
|
$
|
(13,914
|
)
|
|
$
|
(34,884
|
)
|
|
$
|
38,957
|
|
|
$
|
(12,074
|
)
|
|
$
|
(8,001
|
)
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
1,742
|
|
|
—
|
|
|
1,742
|
|
|
—
|
|
|
822
|
|
|
—
|
|
|
822
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(387
|
)
|
|
(1,113
|
)
|
|
40
|
|
|
(1,460
|
)
|
|
256
|
|
|
(2,997
|
)
|
|
42
|
|
|
(2,699
|
)
|
Balance at end of period
|
$
|
(30,256
|
)
|
|
$
|
28,394
|
|
|
$
|
(11,770
|
)
|
|
$
|
(13,632
|
)
|
|
$
|
(34,628
|
)
|
|
$
|
36,782
|
|
|
$
|
(12,032
|
)
|
|
$
|
(9,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended March 31, 2016
|
|
Twelve Months Ended March 31, 2015
|
|
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Unrecognized Pension and Post-retirement Benefit Costs
|
|
Net Unrealized Gains (Losses) on Marketable Securities
|
|
Net Losses on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(34,628
|
)
|
|
$
|
36,782
|
|
|
$
|
(12,032
|
)
|
|
$
|
(9,878
|
)
|
|
$
|
(9,388
|
)
|
|
$
|
34,730
|
|
|
$
|
(12,283
|
)
|
|
$
|
13,059
|
|
|
Other comprehensive income (loss) before reclassifications
|
3,777
|
|
|
(1,335
|
)
|
|
—
|
|
|
2,442
|
|
|
(24,775
|
)
|
|
8,717
|
|
|
—
|
|
|
(16,058
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
595
|
|
|
(7,053
|
)
|
|
262
|
|
|
(6,196
|
)
|
|
(465
|
)
|
|
(6,665
|
)
|
|
251
|
|
|
(6,879
|
)
|
Balance at end of period
|
$
|
(30,256
|
)
|
|
$
|
28,394
|
|
|
$
|
(11,770
|
)
|
|
$
|
(13,632
|
)
|
|
$
|
(34,628
|
)
|
|
$
|
36,782
|
|
|
$
|
(12,032
|
)
|
|
$
|
(9,878
|
)
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Amounts reclassified from accumulated other comprehensive income (loss) for the
three and twelve
months ended
March 31, 2016
and
2015
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 Statement of Operations
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and post-retirement benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit
|
|
$
|
1,666
|
|
|
$
|
1,663
|
|
|
$
|
6,577
|
|
|
$
|
7,863
|
|
|
(a)
|
|
Net loss
|
|
(1,223
|
)
|
|
(2,250
|
)
|
|
(7,595
|
)
|
|
(7,309
|
)
|
|
(a)
|
|
|
|
|
443
|
|
|
(587
|
)
|
|
(1,018
|
)
|
|
554
|
|
|
(a)
|
|
Income tax effect
|
|
(56
|
)
|
|
331
|
|
|
423
|
|
|
(89
|
)
|
|
Income tax expense
|
|
|
|
|
387
|
|
|
(256
|
)
|
|
(595
|
)
|
|
465
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on sale of securities
|
|
1,388
|
|
|
3,745
|
|
|
8,757
|
|
|
8,230
|
|
|
Investment and interest income, net
|
|
|
|
|
1,388
|
|
|
3,745
|
|
|
8,757
|
|
|
8,230
|
|
|
Income before income taxes
|
|
Income tax effect
|
|
(275
|
)
|
|
(748
|
)
|
|
(1,704
|
)
|
|
(1,565
|
)
|
|
Income tax expense
|
|
|
|
|
1,113
|
|
|
2,997
|
|
|
7,053
|
|
|
6,665
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on cash flow hedge:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of loss
|
|
(122
|
)
|
|
(114
|
)
|
|
(475
|
)
|
|
(445
|
)
|
|
Interest on long-term debt and revolving credit facility
|
|
|
|
|
(122
|
)
|
|
(114
|
)
|
|
(475
|
)
|
|
(445
|
)
|
|
Income before income taxes
|
|
Income tax effect
|
|
82
|
|
|
72
|
|
|
213
|
|
|
194
|
|
|
Income tax expense
|
|
|
|
|
(40
|
)
|
|
(42
|
)
|
|
(262
|
)
|
|
(251
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
1,460
|
|
|
$
|
2,699
|
|
|
$
|
6,196
|
|
|
$
|
6,879
|
|
|
|
|
|
(a) These items are included in the computation of net periodic benefit cost. See Note I, Employee Benefits, for additional information.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
C. Regulation
General
The rates and services of the Company are regulated by incorporated municipalities in Texas, the Public Utility Commission of Texas ("PUCT"), the New Mexico Public Regulation Commission ("NMPRC"), and the Federal Regulatory Commission ("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) 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
2012 Texas Retail Rate Case
. On April 17, 2012, the El Paso City Council approved the settlement of the Company's 2012 Texas retail rate case and fuel reconciliation in PUCT Docket No. 40094. The PUCT issued a final order approving the settlement on May 23, 2012 and the rates were effective as of May 1, 2012. As part of the 2012 Texas retail rate settlement, the Company agreed to submit a future fuel reconciliation request covering the period beginning July 1, 2009 and ending no later than June 30, 2013 by December 31, 2013 or as part of its next rate case, if earlier. The Company filed a fuel reconciliation request covering the period July 1, 2009 through March 31, 2013, as discussed below. The 2012 Texas retail rate settlement also provided for the continuation of the energy efficiency cost recovery factor and the military base discount recovery factor. Both of these surcharges require annual filings to reconcile and revise the recovery factors.
2015 Texas Retail Rate Case Filing.
On August 10, 2015, the Company filed with the City of El Paso, other municipalities incorporated in its Texas service territory, and the PUCT in Docket No. 44941, a request for an annual increase in non-fuel base revenues of approximately
$71.5 million
. The request includes recovery of new plant placed into service since 2009. Rate case expenses of
$1.8 million
, amortized over
3 years
, were included in the
$71.5 million
request. On January 15, 2016, the Company filed its rebuttal testimony modifying the requested increase to
$63.3 million
, which included severing the
$1.8 million
of rate case expenses from this rate case. A motion was granted to sever and establish a new docket (Docket No. 45475). The Company has invoked its statutory right to have its new rates relate back for consumption on and after January 12, 2016, which is the
155
th day after the filing. The difference in rates that would have been billed will be surcharged or refunded to customers beginning after the PUCT's final order in Docket No. 44941. The PUCT has the authority to require the Company to surcharge or refund such difference over a period not to exceed
18
months. On January 21, 2016, the Company, the City of El Paso, the PUCT Staff, the Office of Public Utility Counsel and Texas Industrial Energy Consumers filed a joint motion to abate the procedural schedule to facilitate settlement talks. This motion was granted.
On March 29, 2016, the majority of parties to PUCT Docket No. 44941 filed a non-unanimous Stipulation and Agreement ("Settlement Agreement"), together with a motion to implement it. The Settlement Agreement would resolve all issues in this rate case except for one revenue requirement issue involving the Company's interest in Units 4 and 5 of the Four Corners power plant ("Four Corners"). The Settlement Agreement includes, among other things: (i) an annual non-fuel base rate increase of
$37 million
; (ii) the potential for an additional base rate increase of
$8 million
related to Four Corners costs after a hearing and decision; (iii) a change in estimated asset lives which would lower annual depreciation expense by approximately
$8.5 million
; (iv) a return on equity of
9.7%
for AFUDC purposes; and (v) a determination that substantially all new plant in service was reasonable and necessary and therefore would be recoverable in rate base. Approximately
76%
of the Company's customers are in Texas.
The Administrative Law Judges ("ALJs") hearing the case approved interim rates for the
$37 million
annual increase outlined in the Settlement Agreement on March 30, 2016. The interim rates are effective as of April 1, 2016 and are subject to refund or surcharge pending resolution by the PUCT.
Four
parties have indicated that they oppose the Settlement Agreement, and they are entitled to a hearing on the Settlement Agreement. On April 22, 2016, the ALJs issued an Order Setting a Procedural Schedule, which among other things, calls for a hearing on June 21-22, 2016 on the merits of the proposed settlement of the rate case, not including the Four Corners issue. The Company cannot predict the timing and outcome of this rate case at this time.
Given the uncertainty regarding the ultimate resolution of this rate case, the Company did not record any impacts of the Settlement Agreement in the first quarter of 2016. As discussed above, upon resolution of this rate case, the Company expects to record revenues under the new rate structure for consumption on or after January 12, 2016.
Energy Efficiency Cost Recovery Factor.
The Company made its annual filing to establish its energy efficiency cost recovery factor for 2015 on May 1, 2014. In addition to projected energy efficiency costs for 2015 and true-up to prior year actual costs,
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
the Company requested approval of a
$2.0 million
bonus for the 2013 energy efficiency program results in accordance with PUCT rules. The PUCT approved the Company's request at its November 14, 2014 open meeting. The Company recorded the
$2.0 million
bonus as operating revenue in the fourth quarter of 2014.
On May 1, 2015, the Company made its annual filing to establish its energy efficiency cost recovery factor for 2016. In addition to projected energy efficiency costs for 2016 and a true-up to prior year actual costs, the Company requested approval of a
$1.0 million
bonus for the 2014 energy efficiency program results in accordance with PUCT rules. This case was assigned PUCT Docket No. 44677. A stipulation and settlement agreement was filed September 24, 2015 and the PUCT approved the settlement on November 5, 2015. The settlement approved by the PUCT includes a performance bonus of
$1.0 million
. The Company recorded the performance bonus as operating revenue in the fourth quarter of 2015.
On April 29, 2016,
the Company made its annual filing to establish its energy efficiency cost recovery factor for 2017. In addition to projected energy efficiency costs for 2017 and true-up to prior year actual costs, the Company requested approval of a
$668 thousand
bonus for the 2015 energy efficiency program results in accordance with PUCT rules. This case was assigned PUCT Docket No. 45855. The Company expects the Commission will make a final decision in the proceeding before the end of 2016.
Fuel and Purchased Power Costs.
The Company's actual fuel costs, including purchased power energy costs, are recovered from customers through a fixed fuel factor. The PUCT has adopted a fuel cost recovery rule (the "Texas Fuel Rule") that allows the Company to seek periodic adjustments to its fixed fuel factor. The Company can seek to revise its fixed fuel factor based upon the approved formula at least
four
months after its last revision except in the month of December. The Texas Fuel Rule requires the Company to request to refund fuel costs in any month when the over-recovery balance exceeds a threshold material amount and it expects fuel costs to continue to be materially over-recovered. The Texas Fuel Rule also permits the Company to seek to surcharge fuel under-recoveries in any month the balance exceeds a threshold material amount and it expects fuel cost recovery to continue to be materially under-recovered. Fuel over- and under-recoveries are considered material when they exceed
4%
of the previous
twelve
months' fuel costs. All such fuel revenue and expense activities are subject to periodic final review by the PUCT in fuel reconciliation proceedings.
On April 15, 2015, the Company filed a request, which was assigned PUCT Docket No. 44633, to reduce its fixed fuel factor by approximately
24%
to reflect reduced fuel expenses primarily related to a reduction in the price of natural gas used to generate power. The over-recovered balance was below the PUCT's materiality threshold. The reduction in the fixed fuel factor was effective on an interim basis
May 1, 2015
and approved by the PUCT on
May 20, 2015
. As of March 31, 2016, the Company had over-recovered fuel costs in the amount of
$5.2 million
for the Texas jurisdiction.
Fuel Reconciliation Proceeding
. Pursuant to the 2012 Texas retail rate settlement discussed above, on September 27, 2013, the Company filed an application with the PUCT, designated as PUCT Docket No. 41852, to reconcile
$545.3 million
of fuel and purchased power expenses incurred during the
45
-month period from July 1, 2009 through March 31, 2013. A settlement was reached and a final order was issued by the PUCT on July 11, 2014 with no significant adjustments. The PUCT's final order completes the regulatory review and reconciliation of the Company's fuel expenses for the period through March 31, 2013. The Company is required to file an application by the end of the third quarter of 2016 for fuel reconciliation of the Company's fuel expenses for the period through March 31, 2016.
Montana Power Station ("MPS") Approvals
. T
he Company has received a Certificate of Convenience and Necessity ("CCN") from the PUCT to construct
four
natural gas fired generating units at MPS in El Paso County, Texas. The Company also obtained air permits from the Texas Commission on Environmental Quality (the "TCEQ") and the U.S. Environmental Protection Agency (the "EPA"). MPS Units 1 and 2 and associated transmission lines and common facilities were completed and placed into service in
March 2015
. MPS Unit 3 was completed and placed into service on
May 3, 2016
.
Community Solar.
On June 8, 2015, the Company filed a petition with the PUCT to initiate a community solar program to include construction and ownership of a
3
MW solar photovoltaic system located at MPS. Participation will be on a voluntary basis, and customers will contract for a set capacity (kW) amount and receive all energy produced. This case was assigned PUCT Docket No. 44800. The Company has presented settlement documents to the other parties and the other parties are in the process of evaluating them.
Four Corners Generating Station ("Four Corners").
On
February 17, 2015
, the Company and Arizona Public Service Company ("APS") entered into an asset purchase agreement (the "Purchase and Sale Agreement") providing for the purchase by APS of the Company's interests in Four Corners. The Purchase and Sale Agreement included a projected cash purchase price which will be equal to the net book value of our interest in Four Corners at the date of close. The net book value at June 30, 2016 is
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
expected to approximate
$29 million
. The Company will also be reimbursed for certain undepreciated capital expenditures, that are projected to approximate
$5 million
at June 30, 2016. The purchase price will be adjusted downward to reflect APS's assumption of the Company's obligation to pay for future plant decommissioning and mine reclamation expenses estimated at July 6, 2016 to be
$7.0 million
and
$19.3 million
, respectively.
On June 10, 2015, the Company filed an application in Texas requesting reasonableness and public interest findings and certain rate and accounting findings related to the Purchase and Sale Agreement. The anticipated closing date of the sale is
July 6, 2016
, pending regulatory approval. This case was assigned PUCT Docket No. 44805. On January 11, 2016, the PUCT referred the case to the State Office of Administrative Hearings ("SOAH") for an administrative hearing. On February 5, 2016, an administrative law judge ("ALJ") of the SOAH issued an order adopting a procedural schedule. The procedural schedule calls for a hearing on the merits to be held on October 6-7, 2016. At March 31, 2016, the regulatory asset associated with mine reclamation costs for our Texas jurisdiction approximated
$7.4 million
. At the PUCT's February 11, 2016 open meeting, Commissioners discussed whether the Company's requests in this docket should instead be addressed in a rate case. On February 11, 2016, the PUCT issued its Order Requesting Briefing on Threshold Legal/Policy Issues, seeking briefs from the parties on the issue "Should the Commission dismiss this docket?" Such briefs were filed January 25, 2016. In a March 23, 2016 order, the PUCT determined not to dismiss the reasonableness and public interest issues in this docket but to consider the requested rate and accounting findings, including mine reclamation costs, in the Company's next rate case, which is expected to be filed in early 2017.
The Company currently continues to recover its mine reclamation costs in Texas under previous orders and decisions of the PUCT. If any future determinations made by our regulators result in changes to how existing regulatory assets or previously incurred costs for Four Corners are recovered in rates, any such changes would be recognized only when it becomes probable future cash flows will change as a result of such regulatory actions.
Other Required Approvals
. The Company has obtained other required approvals for tariffs and approvals as required by the Public Utility Regulatory Act (the "PURA") and the PUCT.
New Mexico Regulatory Matters
2009 New Mexico Stipulation.
On December 10, 2009, the NMPRC issued a final order conditionally approving the stipulated rates in NMPRC Case No. 09-00171-UT. The stipulated rates went into effect with January 2010 bills. The stipulated rates provide for an Efficient Use of Energy Factor Rate Rider to recover energy efficiency expenditures which are updated annually for adjustment to the recovery factors.
2015 New Mexico Rate Case Filing
. On May 11, 2015, the Company filed with the NMPRC in Case No. 15-00127-UT, for an annual increase in non-fuel base rates of approximately
$8.6 million
or
7.1%
. The request includes recovery of new plant placed into service since the last time rates were adjusted in 2009. The filing also requests an annual reduction of
$15.4 million
, or
21.5%
, for fuel and purchased power costs recovered in base rates. The reduction in fuel and purchased power rates reflects reduced fuel prices and improvements in system heat rates due to new generating unit additions. Subsequently, the Company reduced its requested increase in non-fuel base rates to approximately
$6.4 million
. On February 16, 2016, the Hearing Examiner issued a Recommended Decision to the NMPRC proposing an annual increase in non-fuel base rates of approximately
$640 thousand
. The Company filed exceptions to the Recommended Decision to be considered by the NMPRC. During the open meeting on May 4, 2016, the NMPRC again extended the suspension period until June 10, 2016, by which time the NMPRC is expected to issue a final order. Approximately
24%
of the Company's customers are in New Mexico. The Company cannot predict the outcome of the rate case at this time.
Fuel and Purchased Power Costs.
Fuel and purchased power costs are recovered through base rates and a Fuel and Purchased Power Cost Adjustment Clause (the "FPPCAC") that accounts for changes in the costs of fuel relative to the amount included in base rates. On January 8, 2014, the NMPRC approved the continuation of the FPPCAC without modification in NMPRC Case No. 13-00380-UT. Fuel and purchased power costs are reconciled to actual costs on a monthly basis and recovered or refunded to customers the second succeeding month. The Company recovers costs related to Palo Verde Unit 3 capacity and energy in New Mexico through the FPPCAC as purchased power using a proxy market price approved in the 2014 FPPCAC continuation. At March 31, 2016, the Company had a net fuel over-recovery balance of
$2.8 million
in New Mexico.
Montana Power Station Approvals.
The Company has received a CCN from the NMPRC to construct
four
units at MPS and the associated transmission lines. The Company also obtained all necessary air permits from the TCEQ and the EPA. A final order in
NMPRC Case No. 13-00297-UT
approving the CCN for MPS Units 3 and 4 was issued on June 11, 2014.
MPS Units 1
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
and 2 and MPS to Caliente and MPS In & Out transmission lines were completed and placed into service in
March 2015
.
MPS Unit 3 was completed and placed into service on
May 3, 2016
.
Four Corners.
On
February 17, 2015
, the Company and APS entered into the Purchase and Sale Agreement providing for the purchase by APS of the Company's interests in Four Corners. On April 27, 2015, the Company filed an application requesting all necessary regulatory approvals to sell its ownership interest in Four Corners. The anticipated closing date of the sale is
July 6, 2016
, pending regulatory approval. This case was assigned NMPRC Case No. 15-00109-UT. On February 2, 2016, the Company filed a joint stipulation with the NMPRC reflecting a settlement agreement among the Commission Utility Division Staff, the Company and the New Mexico Attorney General proposing approval of abandonment and sale of its
seven
percent minority ownership interest in Four Corners Units 4 and 5 and common facilities to APS. An addendum to the joint stipulation was subsequently filed and the joint stipulation is unopposed. A hearing in the case was held on February 16, 2016, and the Hearing Examiner issued a Certification of Stipulation on April 22, 2016 recommending approval of the joint stipulation without modification. A NMPRC final order is expected in the first half of 2016. Based on the joint stipulation and addendum, no significant gain or loss is expected to be realized upon closing of the sale.
5 MW Holloman Air Force Base ("HAFB") Facility CCN
. On June 15, 2015, the Company filed a petition with the NMPRC requesting CCN authorization to construct a
5
MW solar-powered generation facility to be located at HAFB in the Company's service territory in New Mexico. The new facility will be a dedicated Company-owned resource serving HAFB. This case was assigned NMPRC Case No. 15-00185-UT. On October 7, 2015, the NMPRC issued a Final Order accepting the Hearing Examiner’s Recommended Decision to approve the CCN, as modified. The Company and HAFB are in discussions for a power sales agreement for the facility to replace the existing load retention agreement.
Issuance of Long-Term Debt and Guarantee of Debt.
On October 7, 2015, the Company received approval in NMPRC Case No. 15-00280-UT to issue up to
$310 million
in new long-term debt; and to guarantee the issuance of up to
$65 million
of new debt by Rio Grande Resources Trust ("RGRT") to finance future purchases of nuclear fuel and to refinance existing nuclear fuel debt obligations. This approval supersedes prior approvals. Under this authorization, on
March 24, 2016
, the Company issued
$150 million
in aggregate principal amount of
5.00%
Senior Notes due
December 1, 2044
. The net proceeds from the issuance of these senior notes, after deducting the underwriters' commission, were
$158.1 million
. These proceeds include accrued interest of
$2.4 million
and a
$7.1 million
premium before expenses. These senior notes constitute an additional issuance of the Company's
5.00%
Senior Notes due
2044
, of which
$150 million
was previously issued on
December 1, 2014
, for a total principal amount outstanding of
$300 million
.
Other Required Approvals
. The Company has obtained other required approvals for other tariffs, securities transactions, recovery of energy efficiency costs through a base rate rider and other approvals as required by the NMPRC.
Federal Regulatory Matters
Four Corners.
On June 26, 2015, APS filed an application requesting authorization from FERC to purchase
100%
of the Company’s ownership interest in Units 4 and 5 of Four Corners and the associated transmission interconnection facilities and rights. On December 22, 2015, FERC issued an order approving the proposed transaction.
Public Service Company of New Mexico (
"
PNM
"
) Transmission Rate Case.
On December 31, 2012, PNM filed with FERC to change its method of transmission rate recovery for its transmission delivery services from stated rates to formula rates. The Company takes transmission service from PNM and is among the PNM transmission customers affected by PNM's shift to formula rates. On March 1, 2013, the FERC issued an order rejecting in part PNM's filing, and establishing settlement judge and hearing procedures. On March 20, 2015, PNM filed with FERC a settlement agreement and offer of settlement resolving all issues set for hearing in the proceeding. On March 25, 2015, the Chief Judge issued an order granting PNM's motion to implement the settled rates. On March 17, 2016, FERC issued an order approving the settlement.
Revolving Credit Facility; Issuance of Long-Term Debt and Guarantee of Debt.
On October 19, 2015, the FERC issued an order in Docket No. ES15-66-000 approving the Company’s filing to issue short-term debt under its existing revolving credit facility ("RCF") up to
$400 million
outstanding at any time, to issue up to
$310 million
in long-term debt, and to guarantee the issuance of up to
$65 million
of new long-term debt by RGRT to finance future nuclear fuel purchases. The authorization is effective from
November 15, 2015
through
November 15, 2017
. This approval supersedes prior approvals. Under this authorization, on
March 24, 2016
, the Company issued
$150 million
in aggregate principal amount of
5.00%
Senior Notes due
December 1, 2044
. The net proceeds from the issuance of these senior notes, after deducting the underwriters' commission, were
$158.1 million
. These proceeds include accrued interest of
$2.4 million
and a
$7.1 million
premium before expenses. These senior notes constitute an
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
additional issuance of the Company's
5.00%
Senior Notes due
2044
, of which
$150 million
was previously issued on
December 1, 2014
, for a total principal amount outstanding of
$300 million
.
Other Required Approvals.
The Company has obtained required approvals for rates and tariffs, securities transactions and other approvals as required by the FERC.
D. Palo Verde
Spent Nuclear Fuel and Waste Disposal
Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 (the "NWPA"), the
U.S. Department of Energy
(the "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 (the "Standard Contract") with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998. On
December 19, 2012
, APS, acting on behalf of itself and the Palo Verde Participants, filed a second breach of contract lawsuit against the DOE. This lawsuit sought to recover damages incurred due to the DOE's failure to accept Palo Verde's spent nuclear fuel for the period beginning
January 1, 2007
through
June 30, 2011
. On
August 18, 2014
, APS and the DOE entered into a settlement agreement, stipulating to a dismissal of the lawsuit and payment of
$57.4 million
by the DOE to the Palo Verde Participants for certain specified costs incurred by Palo Verde during the period
January 1, 2007
through
June 30, 2011
. On
October 8, 2014
, the Company received approximately
$9.1 million
, representing its share of the award. The majority of the award was credited to customers through the applicable fuel adjustment clauses. On
October 31, 2014
, APS acting on behalf of itself and the Palo Verde Participants, submitted to the government an additional request for reimbursement of spent nuclear fuel storage costs for the period
July 1, 2011
through
June 30, 2014
. The accepted claim amount was
$42.0 million
. On
June 1, 2015
, the Company received approximately
$6.6 million
, representing its share of the award. The majority of the award was credited to customers through the applicable fuel adjustment clauses in March 2015. Thereafter APS will file annual claims for the period July 1 of the then-previous year to June 30 of the then-current year. On
November 2, 2015
, APS filed a
$12.0 million
claim for the period
July 1, 2014
through
June 30, 2015
. In February 2016, the DOE notified APS of the approval of the claim. Funds related to this claim were received in the
first quarter of 2016
. The Company's share of this claim is approximately
$1.9 million
. The majority of the award was credited to customers through the applicable fuel adjustment clauses in March 2016.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
E. Common Stock
Dividends.
The Company paid
$11.9 million
and
$11.3 million
in quarterly cash dividends during the
three months ended March 31, 2016
and
2015
, respectively. The Company paid a total of
$47.7 million
and
$45.2 million
in quarterly cash dividends during the twelve months ended
March 31, 2016
and
2015
, 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,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic number of common shares outstanding
|
40,325,324
|
|
|
40,243,199
|
|
|
40,295,316
|
|
|
40,214,198
|
|
Dilutive effect of unvested performance awards
|
—
|
|
|
23,475
|
|
|
36,824
|
|
|
26,595
|
|
Diluted number of common shares outstanding
|
40,325,324
|
|
|
40,266,674
|
|
|
40,332,140
|
|
|
40,240,793
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(5,808
|
)
|
|
$
|
3,458
|
|
|
$
|
72,652
|
|
|
$
|
90,271
|
|
Income allocated to participating restricted stock
|
(32
|
)
|
|
(33
|
)
|
|
(209
|
)
|
|
(289
|
)
|
Net income (loss) available to common shareholders
|
$
|
(5,840
|
)
|
|
$
|
3,425
|
|
|
$
|
72,443
|
|
|
$
|
89,982
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(5,808
|
)
|
|
$
|
3,458
|
|
|
$
|
72,652
|
|
|
$
|
90,271
|
|
Income reallocated to participating restricted stock
|
(32
|
)
|
|
(33
|
)
|
|
(209
|
)
|
|
(289
|
)
|
Net income (loss) available to common shareholders
|
$
|
(5,840
|
)
|
|
$
|
3,425
|
|
|
$
|
72,443
|
|
|
$
|
89,982
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
0.295
|
|
|
$
|
0.28
|
|
|
$
|
1.18
|
|
|
$
|
1.12
|
|
Undistributed earnings (losses)
|
(0.435
|
)
|
|
(0.19
|
)
|
|
0.62
|
|
|
1.12
|
|
Basic net income (loss) per common share
|
$
|
(0.140
|
)
|
|
$
|
0.09
|
|
|
$
|
1.80
|
|
|
$
|
2.24
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
Distributed earnings
|
$
|
0.295
|
|
|
$
|
0.28
|
|
|
$
|
1.18
|
|
|
$
|
1.12
|
|
Undistributed earnings (losses)
|
(0.435
|
)
|
|
(0.19
|
)
|
|
0.62
|
|
|
1.12
|
|
Diluted net income (loss) per common share
|
$
|
(0.140
|
)
|
|
$
|
0.09
|
|
|
$
|
1.80
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount 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,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Restricted stock awards
|
59,462
|
|
|
68,195
|
|
|
54,192
|
|
|
57,651
|
|
Performance shares (a)
|
62,995
|
|
|
59,898
|
|
|
49,183
|
|
|
42,506
|
|
|
|
(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.
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
F. Income Taxes
The Company files income tax returns in the United States ("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 and New Mexico jurisdictions for years prior to
2011
. The Company is currently under audit in Texas for tax years
2007
through
2011
and in Arizona for tax years
2009
through
2012
.
For the
three months ended March 31, 2016
and
2015
, the Company’s effective tax rate was
35.2%
and
22.2%
, respectively. For the twelve months ended
March 31, 2016
and
2015
, the Company's effective tax rate was
29.7%
and
31.0%
, respectively. The Company's effective tax rate for the
three and twelve months ended March 31, 2016
and the
three and twelve months ended March 31, 2015
differs from the federal statutory tax rate of
35.0%
primarily due to capital gains in the decommissioning trusts which are taxed at the federal rate of
20.0%
and the allowance for equity funds used during construction.
In November 2015, the FASB issued new guidance (ASU 2015-17, Balance Sheet Classification of Deferred Taxes) to simplify the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 can be applied prospectively or retrospectively and is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted. The Company elected to implement ASU 2015-17 on a retrospective basis for financial statements issued beginning March 31, 2016. The implementation of ASU 2015-17 did not have a material impact on the Company's results of operations. The impact of ASU 2015-17 on the Company's balance sheet was to reclassify
$21.6
million of current deferred tax assets to long-term deferred tax liabilities at December 31, 2015.
G. Commitments, Contingencies and Uncertainties
For a full discussion of commitments and contingencies, see Note K of Notes to Financial Statements in the
2015
Form 10-K. In addition, see Notes C and D above and Notes C and E of Notes to Financial Statements in the
2015
Form 10-K regarding matters related to wholesale power sales contracts and transmission contracts subject to regulation and Palo Verde, including decommissioning, spent nuclear fuel and waste disposal, and liability and insurance matters.
Power Purchase and Sale Contracts
To supplement its own generation and operating reserve requirements, and to meet required renewable portfolio standards, the Company engages in power purchase arrangements which may vary in duration and amount based on an evaluation of the Company's resource needs, the economics of the transactions, and specific renewable portfolio requirements. For a full discussion of power purchase and sale contracts that the Company has entered into with various counterparties, see Note K of Notes to Financial Statements in the 2015 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. For a more detailed discussion of certain key environmental issues, laws and regulations facing the Company see Note K of Notes to Financial Statements in the
2015
Form 10-K.
Clean Air Interstate Rule/Cross State Air Pollution Rule
. The EPA promulgated the Cross-State Air Pollution Rule ("CSAPR") in August 2011, which rule involves requirements to limit emissions of nitrogen oxides ("NOx") and sulfur dioxide ("SO2") from certain of the Company's power plants in Texas and/or purchase allowances representing other parties' emissions reductions. CSAPR was intended to replace the EPA's 2005 Clean Air Interstate Rule ("CAIR"). While the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") vacated CSAPR in August 2012 and allowed CAIR to stand until the EPA issued a proper replacement, on April 29, 2014, the U.S. Supreme Court reversed and upheld CSAPR, remanding certain portions of CSAPR
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
to the D.C. Circuit for further consideration. On June 26, 2014, the EPA filed a motion asking the D.C. Circuit to lift its stay on CSAPR, and on October 23, 2014, the D.C Circuit lifted its stay of CSAPR. On July 28, 2015, the D.C. Circuit ruled that the EPA's emissions budgets for
13
states including Texas are invalid but left the rule in place on remand. On December 3, 2015, EPA published the proposed CSAPR Update Rule. While we are unable to determine the full impact of this decision until EPA takes further action, the Company believes it is currently positioned to comply with CSAPR.
National Ambient Air Quality Standards ("NAAQS").
Under the CAA, the EPA sets NAAQS for
six
criteria pollutants considered harmful to public health and the environment, including PM, NOx, carbon monoxide ("CO"), ozone and SO2. NAAQS must be reviewed by the EPA at
five
-year intervals. In 2010, the EPA tightened the NAAQS for both nitrogen dioxide ("NO2") and SO2. The EPA is considering a 1-hour secondary NAAQS for NO2 and SO2. In January 2013, the EPA tightened the NAAQS for fine PM. On October 1, 2015, following on its November 2014 proposal, EPA released a final rule tightening the primary and secondary NAAQS for ground-level ozone from its 2008 standard levels of
75
parts per billion ("ppb") to
70
ppb. Ozone is the main component of smog. While not directly emitted into the air, it forms from precursors, including NOx and volatile organic compounds, in combination with sunlight. The EPA is expected to make attainment/nonattainment designations for the revised ozone standards by October 1, 2017. While it is currently unknown how the areas in which we operate will ultimately be designated, for nonattainment areas classified as "Moderate" and above, states, and any tribes that choose to do so, are expected to be required to complete development of implementation plans in the 2020-2021 timeframe. Most nonattainment areas are expected to have until 2020 or 2023 to meet the primary (health) standard, with the exact attainment date varying based on the ozone level in the area. The Company continues to evaluate what impact these final and proposed NAAQS could have on its operations. If the Company is required to install additional equipment to control emissions at its facilities, the NAAQS, individually or in the aggregate, could have a material impact on its operations and financial results.
Mercury and Air Toxics Standards.
The operation of coal-fired power plants, such as Four Corners, results in emissions of mercury and other air toxics. In December 2011, the EPA finalized Mercury and Air Toxics Standards (known as the "MATS Rule") for oil- and coal-fired power plants, which requires significant reductions in emissions of mercury and other air toxics. Several judicial and other challenges have been made to this rule, and on June 29, 2015, the U.S. Supreme Court remanded the rule to the D.C. Circuit Court. On December 15, 2015, the D.C. Circuit Court issued an order remanding the rule to EPA but did not vacate the rule during remand. On April 15, 2016, the EPA completed a cost-benefit analysis of the MATS rule and reaffirmed its finding that the rule is "appropriate and necessary," which will be reviewed by the D.C. Circuit Court. The legal status of the MATS Rule notwithstanding, the Four Corners plant operator, APS, believes Units 4 and 5 will require no additional modifications to achieve compliance with the MATS Rule, as currently written. We cannot currently predict, however, what additional modifications or costs may be incurred if the EPA rewrites the MATS Rule on remand.
Other Laws and Regulations and Risks.
The Company has entered into an agreement to sell its interest in Four Corners to APS at the expiration of the 50-year participation agreement in
July 2016
. The Company believes that it has better economic and cleaner alternatives for serving the energy needs of its customers than coal-fired generation, which is subject to extensive regulation and litigation. By ceasing its participation in Four Corners, the Company expects to avoid the significant cost required to install expensive pollution control equipment in order to continue operation of the plant as well as the risks of water availability that might adversely affect the amount of power available, or the price thereof, from Four Corners in the future. The closing of the transaction is subject to the receipt of regulatory approvals.
Coal Combustion Waste.
On October 19, 2015, the EPA's final rule regulating the disposal of coal combustion residuals (the “CCR Rule”) from electric utilities as solid waste took effect. The Company has a
7%
ownership interest in Units 4 and 5 of Four Corners, the only coal-fired generating facility for which the Company has an ownership interest subject to the CCR Rule. The Company entered into a Purchase and Sale Agreement with APS in February 2015 to sell the Company’s entire ownership interest in Four Corners. The CCR Rule requires plant owners to treat coal combustion residuals as Subtitle D (as opposed to a more costly Subtitle C) waste. In general, the Company is liable for only
7%
of costs to comply with the CCR Rule (consistent with our ownership percentage). The Company, however, believes under the terms of the Purchase Agreement and after the pending sale, as a former owner, that the Company is not responsible for a significant portion of the costs under the CCR Rule, such as ongoing operational costs after July 2016. Accordingly, the Company does not expect the CCR Rule to have a significant impact on our financial condition or results of operations.
On November 3, 2015, the EPA published a final rule revising wastewater effluent limitation guidelines for steam electric power generators (the "Revised ELG Rule"). The Revised ELG Rule establishes requirements for wastewater streams from certain processes at affected facilities, including limits on toxic metals in wastewater discharges. Facilities must comply with the Revised ELG Rule between 2018 and 2023. The EPA anticipates that the new requirements in the Revised ELG Rule will only affect certain
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
coal-fired steam electric power plants. Because the Company is not expected to have an interest in Four Corners after July 2016, the Company does not expect the Revised ELG Rule will have a significant impact on our financial condition or results of operations.
In 2012, several environmental groups filed a lawsuit in federal district court against the Office of Surface Mining Reclamation and Enforcement ("OSM") of the U.S. Department of the Interior challenging OSM’s 2012 approval of a permit revision which allowed for the expansion of mining operations into a new area of the mine that serves Four Corners ("Area IV North"). In April 2015, the court issued an order invalidating the permit revision, thereby prohibiting mining in Area IV North until OSM takes action to cure the defect in its permitting process identified by the court. On December 29, 2015, OSM took action to cure the defect in its permitting process by issuing a revised environmental assessment and finding of no new significant impact, and reissued the permit. This action is subject to possible judicial review. On March 30, 2016, the U.S. Court of Appeals vacated and dismissed the federal court decision that halted operations in Area IV North at the Navajo Mine.
On April 20, 2016, environmental groups filed a new complaint in Arizona's federal district court, challenging multiple permits and approvals issued to both the Navajo Mine and Four Corners authorizing operations from July 2016 onwards. The complaint seeks to enjoin federal agencies, including the OSM and Bureau of Indian Affairs, from authorizing any element of the power plant or mine without further environmental impact analysis.
Climate Change.
In recent years, there has been increasing public debate regarding the potential impact on global climate change. There has been a wide-ranging policy debate, both nationally and internationally, regarding the impact of GHG and possible means for their regulation. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues. Most recently, in 2015, the United States participated in the United Nations Conference on Climate Change, which led to creation of the Paris Agreement. On April 22, 2016,
175
countries including the United States signed the Paris Agreement, signaling their intent to join. Those countries that subsequently ratify the agreement will be required to review and "represent a progression" in their intended nationally determined contributions, which set GHG emission reduction goals, every
five
years beginning in 2020.
The U.S. federal government has either considered, proposed and/or finalized legislation or regulations limiting GHG emissions, including carbon dioxide. In particular, the U.S. Congress has considered legislation to restrict or regulate GHG emissions. In the past few years, the EPA began using the CAA to regulate carbon dioxide and other GHG emissions, such as the 2009 GHG Reporting Rule and the EPA's sulfur hexafluoride ("SF6") reporting rule, both of which apply to the Company, as well as the EPA's 2010 actions to impose permitting requirements on new and modified sources of GHG emissions. After announcing his plan to address climate change in 2013, the President directed the EPA to issue proposals for GHG rulemaking addressing power plants. In October 2015, the EPA published a final rule establishing new source performance standards ("NSPS") limiting CO2 emissions from new, modified and reconstructed electric generating units. In October 2015, the EPA also published a rule establishing guidelines for states to regulate CO2 emissions from existing power plants, as well as a proposed "federal plan" to address CO2 emissions from affected units in those states that do not submit an approvable compliance plan. The standards for existing plants are known as the Clean Power Plan ("CPP"), under which rule interim emissions performance rates must be achieved beginning in 2022 and final emissions performance rates by 2030. Legal challenges to the CPP were filed by groups of states and industry members. On February 9, 2016, the U.S. Supreme Court issued a decision to stay the rule until legal issues are resolved. We cannot at this time determine the impact the CPP and related rules and legal challenges may have on our financial position, results of operations or cash flows.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
New Mexico Tax Matter Related to Coal Supplied to Four Corners
On May 23, 2013, the New Mexico Taxation and Revenue Department ("NMTRD") issued a notice of assessment for coal severance surtax, penalty, and interest totaling approximately
$30 million
related to coal supplied under the coal supply agreement for Four Corners (the "Assessment"). The Company's share of the Assessment is approximately
$1.5 million
. On behalf of the Four Corners participants, the coal supplier made a partial payment of the Assessment and immediately filed a refund claim with respect to that partial payment in August 2013. The NMTRD denied the refund claim. On December 19, 2013, the coal supplier and APS, on its own behalf and as operating agent for Four Corners, filed complaints with the New Mexico District Court contesting both the validity of the Assessment and the refund claim denial. On June 30, 2015, the court ruled that the Assessment was not valid and further ruled that APS and the other Four Corners co-owners receive a refund of all of the contested amounts previously paid under the applicable tax statute. The NMTRD filed a Notice of Appeal on August 31, 2015 with respect to the decision. Thereafter, APS and the coal supplier agreed to terms for a settlement with the NMTRD with respect to the Assessment. Pursuant to the final settlement agreement, the NMTRD agreed to release the Assessment, dismiss its filed appeal, and release its rights to any other surtax claims with respect to the coal supply agreement. APS and the other Four Corners participants agreed to forgo refund rights with respect to all the contested amounts previously paid under the applicable tax statute, in addition to a
$1.0 million
settlement payment. The Company paid its share of this settlement, approximately
$47 thousand
, in April 2016.
H. Litigation
The Company is involved in various legal, environmental, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business. In many of these matters, the Company has excess casualty liability insurance that covers the various claims, actions and complaints. The Company regularly analyzes current information and, as necessary, makes provisions in its financial statements for probable liabilities for the eventual disposition of these matters. While the outcome of these matters cannot be predicted with certainty, based upon a review of the matters and applicable insurance coverage, the Company believes that none of these matters will have a material adverse effect on the financial position, results of operations or cash flows of the Company. The Company expenses legal costs, including expenses related to loss contingencies, as they are incurred.
See Notes C and G above and Notes C and K of the Notes to Financial Statements in the 2015 Form 10-K for discussion of the effects of government legislation and regulation on the Company.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
I. Employee Benefits
Retirement Plans
The net periodic benefit cost recognized for the
three and twelve months ended
March 31, 2016
and
2015
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,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
1,905
|
|
|
$
|
2,100
|
|
|
$
|
8,597
|
|
|
$
|
8,514
|
|
Interest cost
|
3,265
|
|
|
3,625
|
|
|
14,135
|
|
|
14,797
|
|
Expected return on plan assets
|
(4,712
|
)
|
|
(4,947
|
)
|
|
(19,560
|
)
|
|
(18,966
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Net loss
|
1,888
|
|
|
2,750
|
|
|
9,785
|
|
|
9,830
|
|
Prior service benefit
|
(878
|
)
|
|
(888
|
)
|
|
(3,496
|
)
|
|
(3,535
|
)
|
Net periodic benefit cost
|
$
|
1,468
|
|
|
$
|
2,640
|
|
|
$
|
9,461
|
|
|
$
|
10,640
|
|
During the
three months ended
March 31, 2016
, the Company contributed
$1.8 million
of its projected
$6.2 million
2016
annual contribution to its retirement plans.
Other Postretirement Benefits
The net periodic benefit cost recognized for the
three and twelve months ended
March 31, 2016
and
2015
is made up of the components listed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
715
|
|
|
$
|
875
|
|
|
$
|
3,294
|
|
|
$
|
3,020
|
|
Interest cost
|
873
|
|
|
1,025
|
|
|
3,883
|
|
|
4,363
|
|
Expected return on plan assets
|
(460
|
)
|
|
(525
|
)
|
|
(2,005
|
)
|
|
(2,116
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service benefit
|
(788
|
)
|
|
(775
|
)
|
|
(3,081
|
)
|
|
(4,328
|
)
|
Net gain
|
(665
|
)
|
|
(500
|
)
|
|
(2,190
|
)
|
|
(2,521
|
)
|
Net periodic benefit cost (benefit)
|
$
|
(325
|
)
|
|
$
|
100
|
|
|
$
|
(99
|
)
|
|
$
|
(1,582
|
)
|
During the
three months ended
March 31, 2016
, the Company contributed
$0.6 million
of its projected
$1.7 million
2016
annual contribution to its other post retirement benefits plan.
J. Financial Instruments and Investments
The FASB guidance requires the Company to disclose estimated fair values for its financial instruments. The Company has determined that cash and temporary investments, investment in debt securities, accounts receivable, decommissioning trust funds, long-term debt, short-term borrowings under the RCF, accounts payable and customer deposits meet the definition of financial instruments. The carrying amounts of cash and temporary investments, accounts receivable, accounts payable and customer deposits approximate fair value because of the short maturity of these items. Investments in debt securities and decommissioning trust funds are carried at estimated fair value.
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Long-Term Debt and Short-Term Borrowings Under the RCF.
The fair values of the Company's long-term debt and short-term borrowings under the RCF are based on estimated market prices for similar issues and are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Carrying
Amount (1)
|
|
Estimated
Fair
Value
|
|
Carrying
Amount (1)
|
|
Estimated
Fair
Value
|
Pollution Control Bonds
|
$
|
190,568
|
|
|
$
|
212,123
|
|
|
$
|
190,499
|
|
|
$
|
212,624
|
|
Senior Notes
|
993,195
|
|
|
1,159,850
|
|
|
837,475
|
|
|
829,864
|
|
RGRT Senior Notes (2)
|
94,686
|
|
|
101,190
|
|
|
94,686
|
|
|
100,345
|
|
RCF (2)
|
87,050
|
|
|
87,050
|
|
|
141,738
|
|
|
141,738
|
|
Total
|
$
|
1,365,499
|
|
|
$
|
1,560,213
|
|
|
$
|
1,264,398
|
|
|
$
|
1,284,571
|
|
_______________
|
|
(1)
|
The Company implemented ASU 2015-03, Interest - Imputation of Interest, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.The impact of ASU 2015-03 on the Company's balance sheet was to reclassify
$11.6 million
of other deferred charges to long-term debt, net of current portion at December 31, 2015.
|
|
|
(2)
|
Nuclear fuel financing, as of
March 31, 2016
and
December 31, 2015
, is funded through the
$95 million
RGRT Senior Notes and
$37.1 million
and
$33.7 million
, respectively under the RCF. As of
March 31, 2016
,
$50.0 million
was outstanding under the RCF for working capital or general corporate purposes. As of
December 31, 2015
,
$108.0 million
was outstanding under the RCF for working capital or general corporate purposes. The interest rate on the Company's borrowings under the RCF is reset throughout the quarter reflecting c
urrent market rates. Consequently, the carrying value approximates fair value.
|
Marketable Securities.
The Company's marketable securities, included in decommissioning trus
t funds in the balance sheets, are reported at fair value which was
$243.7 million
and
$239.0 million
at
March 31, 2016
and
December 31, 2015
, respectively. These securities are classified as available for sale and recorded at their estimated fair value using the FASB guidance for certain investments in debt and equity securities. The reported fair values include gross unrealized losses on marketable securities whose impairment the Company has deemed to be temporary. The tables below present the gross unrealized losses and the fair value of these securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Description of Securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
996
|
|
|
$
|
(2
|
)
|
|
$
|
1,109
|
|
|
$
|
(23
|
)
|
|
$
|
2,105
|
|
|
$
|
(25
|
)
|
U.S. Government Bonds
|
8,656
|
|
|
(51
|
)
|
|
13,666
|
|
|
(501
|
)
|
|
22,322
|
|
|
(552
|
)
|
Municipal Obligations
|
3,569
|
|
|
(42
|
)
|
|
8,681
|
|
|
(513
|
)
|
|
12,250
|
|
|
(555
|
)
|
Corporate Obligations
|
3,128
|
|
|
(170
|
)
|
|
2,949
|
|
|
(276
|
)
|
|
6,077
|
|
|
(446
|
)
|
Total Debt Securities
|
16,349
|
|
|
(265
|
)
|
|
26,405
|
|
|
(1,313
|
)
|
|
42,754
|
|
|
(1,578
|
)
|
Common Stock
|
3,441
|
|
|
(620
|
)
|
|
—
|
|
|
—
|
|
|
3,441
|
|
|
(620
|
)
|
Institutional Equity Funds-International Equity
|
21,856
|
|
|
(1,321
|
)
|
|
—
|
|
|
—
|
|
|
21,856
|
|
|
(1,321
|
)
|
Total Temporarily Impaired Securities
|
$
|
41,646
|
|
|
$
|
(2,206
|
)
|
|
$
|
26,405
|
|
|
$
|
(1,313
|
)
|
|
$
|
68,051
|
|
|
$
|
(3,519
|
)
|
_________________
|
|
(1)
|
Includes
105
securities.
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Description of Securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
9,383
|
|
|
$
|
(97
|
)
|
|
$
|
1,113
|
|
|
$
|
(47
|
)
|
|
$
|
10,496
|
|
|
$
|
(144
|
)
|
U.S. Government Bonds
|
24,094
|
|
|
(310
|
)
|
|
14,272
|
|
|
(623
|
)
|
|
38,366
|
|
|
(933
|
)
|
Municipal Obligations
|
8,286
|
|
|
(160
|
)
|
|
7,388
|
|
|
(446
|
)
|
|
15,674
|
|
|
(606
|
)
|
Corporate Obligations
|
6,058
|
|
|
(722
|
)
|
|
2,307
|
|
|
(228
|
)
|
|
8,365
|
|
|
(950
|
)
|
Total Debt Securities
|
47,821
|
|
|
(1,289
|
)
|
|
25,080
|
|
|
(1,344
|
)
|
|
72,901
|
|
|
(2,633
|
)
|
Common Stock
|
3,584
|
|
|
(344
|
)
|
|
—
|
|
|
—
|
|
|
3,584
|
|
|
(344
|
)
|
Institutional Equity Funds-International Equity
|
22,454
|
|
|
(768
|
)
|
|
—
|
|
|
—
|
|
|
22,454
|
|
|
(768
|
)
|
Total Temporarily Impaired Securities
|
$
|
73,859
|
|
|
$
|
(2,401
|
)
|
|
$
|
25,080
|
|
|
$
|
(1,344
|
)
|
|
$
|
98,939
|
|
|
$
|
(3,745
|
)
|
_________________
|
|
(2)
|
Includes
133
securities.
|
The Company monitors the length of time specific securities trade below its cost basis along with the amount and percentage of the unrealized loss in determining if a decline in fair value of marketable securities below recorded cost is considered to be other than temporary. The Company recognizes impairment losses on certain of its securities deemed to be other than temporary. In accordance with the FASB guidance, these impairment losses are recognized in net income, and a lower cost basis is established for these securities. In addition, the Company will research the future prospects of individual securities as necessary. The Company does not anticipate expending monies held in trust before 2044 or a later period when decommissioning of Palo Verde begins.
For the three and twelve months ended March 31, 2016 and 2015, the Company recognized other than temporary impairment losses on its available-for-sale securities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Unrealized holding losses included in pre-tax income
|
$
|
(156
|
)
|
|
$
|
—
|
|
|
$
|
(494
|
)
|
|
$
|
—
|
|
The reported securities also include gross unrealized gains on marketable securities which have not been recognized in the Company's net income. The table below presents the unrecognized gross unrealized gains and the fair value of these securities, aggregated by investment category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
Fair
Value
|
|
Unrealized
Gains
|
|
Fair
Value
|
|
Unrealized
Gains
|
Description of Securities:
|
|
|
|
|
|
|
|
Federal Agency Mortgage Backed Securities
|
$
|
17,633
|
|
|
$
|
621
|
|
|
$
|
9,589
|
|
|
$
|
438
|
|
U.S. Government Bonds
|
32,557
|
|
|
1,005
|
|
|
12,033
|
|
|
136
|
|
Municipal Obligations
|
10,622
|
|
|
458
|
|
|
8,671
|
|
|
332
|
|
Corporate Obligations
|
16,070
|
|
|
799
|
|
|
10,110
|
|
|
368
|
|
Total Debt Securities
|
76,882
|
|
|
2,883
|
|
|
40,403
|
|
|
1,274
|
|
Common Stock
|
68,928
|
|
|
35,675
|
|
|
72,636
|
|
|
37,001
|
|
Equity Mutual Funds
|
23,764
|
|
|
382
|
|
|
18,853
|
|
|
91
|
|
Cash and Cash Equivalents
|
6,065
|
|
|
—
|
|
|
8,204
|
|
|
—
|
|
Total
|
$
|
175,639
|
|
|
$
|
38,940
|
|
|
$
|
140,096
|
|
|
$
|
38,366
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The Company's marketable securities include investments in municipal, corporate and federal debt obligations. Substantially all of the Company's mortgage-backed securities, based on contractual maturity, are due in
ten years
or more. The mortgage-backed securities have an estimated weighted average maturity which generally range from
two years
to
six years
and reflects anticipated future prepayments. The contractual year for maturity of these available-for-sale securities as of
March 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2016
|
|
2017
through
2020
|
|
2021 through 2025
|
|
2026 and Beyond
|
Municipal Debt Obligations
|
$
|
22,872
|
|
|
$
|
717
|
|
|
$
|
9,302
|
|
|
$
|
11,340
|
|
|
$
|
1,513
|
|
Corporate Debt Obligations
|
22,147
|
|
|
—
|
|
|
5,863
|
|
|
8,389
|
|
|
7,895
|
|
U.S. Government Bonds
|
54,879
|
|
|
3,413
|
|
|
25,654
|
|
|
14,189
|
|
|
11,623
|
|
The Company's marketable securities in its decommissioning trust funds are sold from time to time and the Company uses the specific identification basis to determine the amount to reclassify out of accumulated other comprehensive income and into net income. The proceeds from the sale of these securities during the three and twelve months ended March 31, 2016 and 2015 and the related effects on pre-tax income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months Ended
|
|
March 31,
|
|
March 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Proceeds from sales or maturities of available-for-sale securities
|
$
|
24,078
|
|
|
$
|
24,642
|
|
|
$
|
102,003
|
|
|
$
|
104,126
|
|
Gross realized gains included in pre-tax income
|
$
|
1,832
|
|
|
$
|
3,782
|
|
|
$
|
10,429
|
|
|
$
|
8,626
|
|
Gross realized losses included in pre-tax income
|
(288
|
)
|
|
(37
|
)
|
|
(1,178
|
)
|
|
(396
|
)
|
Gross unrealized losses included in pre-tax income
|
(156
|
)
|
|
—
|
|
|
(494
|
)
|
|
—
|
|
Net gains in pre-tax income
|
$
|
1,388
|
|
|
$
|
3,745
|
|
|
$
|
8,757
|
|
|
$
|
8,230
|
|
Net unrealized holding gains (losses) included in accumulated other comprehensive income
|
$
|
2,190
|
|
|
$
|
1,014
|
|
|
$
|
(1,730
|
)
|
|
$
|
10,843
|
|
Net gains reclassified out of accumulated other comprehensive income
|
(1,388
|
)
|
|
(3,745
|
)
|
|
(8,757
|
)
|
|
(8,230
|
)
|
Net gains (losses) in other comprehensive income
|
$
|
802
|
|
|
$
|
(2,731
|
)
|
|
$
|
(10,487
|
)
|
|
$
|
2,613
|
|
Fair Value Measurements.
The FASB guidance requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company's decommissioning trust investments and investments in debt securities which are included in deferred charges and other assets on the balance sheets. The Company has no liabilities that are measured at fair value on a recurring basis. The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
|
•
|
Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the nuclear decommissioning trust investments in active exchange-traded equity securities, mutual funds and U.S. Treasury securities that are in a highly liquid and active market.
|
|
|
•
|
Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Financial assets utilizing Level 2 inputs include the nuclear decommissioning trust investments in fixed income securities. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences. The Institutional Funds are valued using the NAV provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets.
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
|
•
|
Level 3 – Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analysis. Financial assets utilizing Level 3 inputs are the Company's investment in debt securities.
|
The securities in the Company's decommissioning trust funds are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. The FASB guidance identifies this valuation technique as the "market approach" with observable inputs. The Company analyzes available-for-sale securities to determine if losses are other than temporary.
The fair value of the Company's decommissioning trust funds and investments in debt securities at
March 31, 2016
and
December 31, 2015
, and the level within the three levels of the fair value hierarchy defined by the FASB guidance are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
Fair Value as of March 31, 2016
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Trading Securities:
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
$
|
1,515
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,515
|
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Government Bonds
|
$
|
54,879
|
|
|
$
|
54,879
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal Agency Mortgage Backed Securities
|
19,738
|
|
|
—
|
|
|
19,738
|
|
|
—
|
|
Municipal Bonds
|
22,872
|
|
|
—
|
|
|
22,872
|
|
|
—
|
|
Corporate Asset Backed Obligations
|
22,147
|
|
|
—
|
|
|
22,147
|
|
|
—
|
|
Subtotal Debt Securities
|
119,636
|
|
|
54,879
|
|
|
64,757
|
|
|
—
|
|
Common Stock
|
72,369
|
|
|
72,369
|
|
|
—
|
|
|
—
|
|
Equity Mutual Funds
|
23,764
|
|
|
23,764
|
|
|
—
|
|
|
—
|
|
Institutional Funds-International Equity (1)
|
21,856
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
6,065
|
|
|
6,065
|
|
|
—
|
|
|
—
|
|
Total Available for Sale
|
$
|
243,690
|
|
|
$
|
157,077
|
|
|
$
|
64,757
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
Fair Value as of December 31, 2015
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Trading Securities:
|
|
|
|
|
|
|
|
Investments in Debt Securities
|
$
|
1,543
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,543
|
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Government Bonds
|
$
|
50,399
|
|
|
$
|
50,399
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Federal Agency Mortgage Backed Securities
|
20,085
|
|
|
—
|
|
|
20,085
|
|
|
—
|
|
Municipal Bonds
|
24,345
|
|
|
—
|
|
|
24,345
|
|
|
—
|
|
Corporate Asset Backed Obligations
|
18,475
|
|
|
—
|
|
|
18,475
|
|
|
—
|
|
Subtotal Debt Securities
|
113,304
|
|
|
50,399
|
|
|
62,905
|
|
|
—
|
|
Common Stock
|
76,220
|
|
|
76,220
|
|
|
—
|
|
|
—
|
|
Equity Mutual Funds
|
18,853
|
|
|
18,853
|
|
|
—
|
|
|
—
|
|
Institutional Funds-International Equity (1)
|
22,454
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
8,204
|
|
|
8,204
|
|
|
—
|
|
|
—
|
|
Total Available for Sale
|
$
|
239,035
|
|
|
$
|
153,676
|
|
|
$
|
62,905
|
|
|
$
|
—
|
|
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) In accordance with ASU 2015-07 Subtopic 820-10, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
There were
no
transfers in or out of Level 1 and Level 2 fair value measurements categories due to changes in observable inputs during the
three and twelve
month periods ended
March 31, 2016
and
2015
. There were
no
purchases, sales, issuances, and settlements related to the assets in the Level 3 fair value measurement category during the
three and twelve months ended
March 31, 2016
and
2015
.