Document
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________ 
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
Commission file number: 001-14206
El Paso Electric Company
(Exact name of registrant as specified in its charter)
Texas
 
74-0607870
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
Stanton Tower, 100 North Stanton, El Paso, Texas
 
79901
(Address of principal executive offices)
 
(Zip Code)
(915) 543-5711
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  o    NO  x
As of October 31, 2017, there were 40,591,794 shares of the Company’s no par value common stock outstanding.
 
 
 
 
 



Table of Contents

EL PASO ELECTRIC COMPANY
INDEX TO FORM 10-Q
 
 
 
Page No.
 
Item 1.
 
 
 

 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 


 
( i)
 

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

EL PASO ELECTRIC COMPANY
BALANCE SHEETS
 
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
 
 
 
ASSETS
(In thousands)
 
 
 
Utility plant:
 
 
 
Electric plant in service
$
3,928,478

 
$
3,791,566

Less accumulated depreciation and amortization
(1,306,482
)
 
(1,244,332
)
Net plant in service
2,621,996

 
2,547,234

Construction work in progress
154,806

 
154,738

Nuclear fuel; includes fuel in process of $71,715 and $57,315, respectively
207,655

 
194,842

Less accumulated amortization
(85,221
)
 
(75,602
)
Net nuclear fuel
122,434

 
119,240

Net utility plant
2,899,236

 
2,821,212

Current assets:
 
 
 
Cash and cash equivalents
7,060

 
8,420

Accounts receivable, principally trade, net of allowance for doubtful accounts of $2,432 and $2,156, respectively
127,505

 
88,452

Inventories, at cost
51,125

 
47,216

Under-collection of fuel revenues

 
11,123

Prepayments and other
13,310

 
8,988

Total current assets
199,000

 
164,199

Deferred charges and other assets:
 
 
 
Decommissioning trust funds
278,119

 
255,708

Regulatory assets
112,529

 
118,861

Other
16,570

 
16,298

Total deferred charges and other assets
407,218

 
390,867

Total assets
$
3,505,454

 
$
3,376,278


See accompanying notes to financial statements.

 
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Table of Contents

EL PASO ELECTRIC COMPANY
BALANCE SHEETS (Continued)
 
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
CAPITALIZATION AND LIABILITIES
(In thousands except for share data)
 
 
 
Capitalization:
 
 
 
Common stock, stated value $1 per share, 100,000,000 shares authorized, 65,666,808 and 65,685,615 shares issued, and 161,880 and 137,017 restricted shares, respectively
$
65,829

 
$
65,823

Capital in excess of stated value
324,926

 
322,643

Retained earnings
1,166,757

 
1,114,561

Accumulated other comprehensive loss, net of tax
(1,150
)
 
(7,116
)
 
1,556,362

 
1,495,911

Treasury stock, 25,236,894 and 25,304,914 shares, respectively, at cost
(420,382
)
 
(421,515
)
Common stock equity
1,135,980

 
1,074,396

Long-term debt, net of current portion
1,195,868

 
1,195,513

Total capitalization
2,331,848

 
2,269,909

Current liabilities:
 
 
 
Current maturities of long-term debt

 
83,143

Short-term borrowings under the revolving credit facility
167,901

 
81,574

Accounts payable, principally trade
57,250

 
62,953

Taxes accrued
39,063

 
32,488

Interest accrued
19,028

 
13,287

Over-collection of fuel revenues
3,020

 
255

Other
29,571

 
29,709

Total current liabilities
315,833

 
303,409

Deferred credits and other liabilities:
 
 
 
Accumulated deferred income taxes
596,042

 
555,066

Accrued pension liability
85,189

 
92,768

Accrued post-retirement benefit liability
36,353

 
34,400

Asset retirement obligation
91,123

 
81,800

Regulatory liabilities
24,233

 
18,435

Other
24,833

 
20,491

Total deferred credits and other liabilities
857,773

 
802,960

Commitments and contingencies


 


Total capitalization and liabilities
$
3,505,454

 
$
3,376,278

See accompanying notes to financial statements.

 
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Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Operating revenues
$
297,470

 
$
323,225

 
$
720,648

 
$
698,899

Energy expenses:
 
 
 
 
 
 
 
Fuel
57,889

 
54,355

 
143,668

 
131,817

Purchased and interchanged power
17,430

 
24,459

 
47,824

 
47,715

 
75,319

 
78,814

 
191,492

 
179,532

Operating revenues net of energy expenses
222,151

 
244,411

 
529,156

 
519,367

Other operating expenses:
 
 
 
 
 
 
 
Other operations
60,692

 
64,373

 
176,650

 
179,577

Maintenance
11,944

 
14,064

 
53,349

 
52,005

Depreciation and amortization
22,565

 
15,952

 
66,994

 
63,097

Taxes other than income taxes
21,213

 
20,165

 
54,208

 
50,297

 
116,414

 
114,554

 
351,201

 
344,976

Operating income
105,737

 
129,857

 
177,955

 
174,391

Other income (deductions):
 
 
 
 
 
 
 
Allowance for equity funds used during construction
668

 
1,398

 
2,209

 
5,867

Investment and interest income, net
3,715

 
3,773

 
14,487

 
10,293

Miscellaneous non-operating income
242

 
272

 
366

 
1,073

Miscellaneous non-operating deductions
(1,067
)
 
(1,312
)
 
(2,337
)
 
(2,668
)
 
3,558

 
4,131

 
14,725

 
14,565

Interest charges (credits):
 
 
 
 
 
 
 
Interest on long-term debt and revolving credit facility
18,215

 
18,324

 
54,989

 
53,221

Other interest
728

 
268

 
1,910

 
1,102

Capitalized interest
(1,193
)
 
(1,243
)
 
(3,831
)
 
(3,738
)
Allowance for borrowed funds used during construction
(671
)
 
(1,131
)
 
(2,173
)
 
(4,164
)
 
17,079

 
16,218

 
50,895

 
46,421

Income before income taxes
92,216

 
117,770

 
141,785

 
142,535

Income tax expense
32,532

 
43,134

 
50,024

 
51,423

Net income
$
59,684

 
$
74,636

 
$
91,761

 
$
91,112

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.47

 
$
1.84

 
$
2.26

 
$
2.25

 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.47

 
$
1.84

 
$
2.26

 
$
2.25

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.335

 
$
0.310

 
$
0.980

 
$
0.915

Weighted average number of shares outstanding
40,427,589

 
40,363,819

 
40,408,100

 
40,344,834

Weighted average number of shares and dilutive potential shares outstanding
40,551,315

 
40,425,942

 
40,516,777

 
40,395,811


 See accompanying notes to financial statements.





 
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Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share data)

 
Twelve Months Ended
 
September 30,
 
2017
 
2016
Operating revenues
$
908,685

 
$
875,801

Energy expenses:
 
 
 
Fuel
185,589

 
171,877

Purchased and interchanged power
59,836

 
58,823

 
245,425

 
230,700

Operating revenues net of energy expenses
663,260

 
645,101

Other operating expenses:
 
 
 
Other operations
239,087

 
243,912

Maintenance
68,090

 
67,456

Depreciation and amortization
88,214

 
85,841

Taxes other than income taxes
69,444

 
65,189

 
464,835

 
462,398

Operating income
198,425

 
182,703

Other income (deductions):
 
 
 
Allowance for equity funds used during construction
3,365

 
8,089

Investment and interest income, net
18,277

 
15,237

Miscellaneous non-operating income
585

 
1,598

Miscellaneous non-operating deductions
(3,368
)
 
(4,219
)
 
18,859

 
20,705

Interest charges (credits):
 
 
 
Interest on long-term debt and revolving credit facility
73,312

 
69,629

Other interest
2,111

 
1,474

Capitalized interest
(5,083
)
 
(4,948
)
Allowance for borrowed funds used during construction
(2,992
)
 
(5,736
)
 
67,348

 
60,419

Income before income taxes
149,936

 
142,989

Income tax expense
52,519

 
51,229

Net income
$
97,417

 
$
91,760

 
 
 
 
Basic earnings per share
$
2.40

 
$
2.27

 
 
 
 
Diluted earnings per share
$
2.40

 
$
2.27

 
 
 
 
Dividends declared per share of common stock
$
1.29

 
$
1.21

Weighted average number of shares outstanding
40,398,022

 
40,332,835

Weighted average number of shares and dilutive potential shares outstanding
40,498,642

 
40,380,443

 
See accompanying notes to financial statements.


 
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Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net income
$
59,684

 
$
74,636

 
$
91,761

 
$
91,112

 
$
97,417

 
$
91,760

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Unrecognized pension and post-retirement benefit costs:
 
 
 
 
 
 
 
 
 
 
 
Net (loss) gain arising during period

 

 

 

 
(20,053
)
 
5,429

Prior service benefit

 

 

 

 
32,697

 
824

Reclassification adjustments included in net income for amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service benefit
(2,414
)
 
(1,663
)
 
(7,243
)
 
(4,993
)
 
(9,657
)
 
(6,636
)
Net loss
1,695

 
1,087

 
5,083

 
3,532

 
6,516

 
5,688

Net unrealized gains on marketable securities:
 
 
 
 
 
 
 
 
 
 
 
Net holding gains arising during period
5,945

 
4,313

 
18,124

 
9,293

 
17,275

 
15,028

Reclassification adjustments for net gains included in net income
(1,765
)
 
(2,072
)
 
(9,122
)
 
(5,570
)
 
(11,192
)
 
(8,797
)
Net losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment for interest expense included in net income
134

 
126

 
396

 
371

 
523

 
490

Total other comprehensive income before income taxes
3,595

 
1,791

 
7,238

 
2,633

 
16,109

 
12,026

Income tax benefit (expense) related to items of other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized pension and post-retirement benefit costs
262

 
(228
)
 
716

 
(6
)
 
(3,539
)
 
(2,536
)
Net unrealized gains on marketable securities
(825
)
 
(435
)
 
(1,814
)
 
(757
)
 
(1,163
)
 
(1,269
)
Losses on cash flow hedges
(49
)
 
(165
)
 
(174
)
 
(293
)
 
(220
)
 
(335
)
Total income tax expense
(612
)
 
(828
)
 
(1,272
)
 
(1,056
)
 
(4,922
)
 
(4,140
)
Other comprehensive income, net of tax
2,983

 
963

 
5,966

 
1,577

 
11,187

 
7,886

Comprehensive income
$
62,667

 
$
75,599

 
$
97,727

 
$
92,689

 
$
108,604

 
$
99,646

See accompanying notes to financial statements.

 
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Table of Contents

EL PASO ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
91,761

 
$
91,112

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of electric plant in service
66,994

 
63,097

Amortization of nuclear fuel
32,494

 
33,088

Deferred income taxes, net
47,457

 
48,457

Allowance for equity funds used during construction
(2,209
)
 
(5,867
)
Other amortization and accretion
14,934

 
12,102

Gain on sale of property, plant and equipment

 
(545
)
Net gains on sale of decommissioning trust funds
(9,122
)
 
(5,570
)
Other operating activities
(762
)
 
871

Change in:
 
 
 
Accounts receivable
(39,298
)
 
(46,371
)
Inventories
(2,988
)
 
(16
)
Net under/over-collection of fuel revenues
13,888

 
(11,766
)
Prepayments and other
(5,120
)
 
(4,467
)
Accounts payable
525

 
6,994

Taxes accrued
6,539

 
4,560

Interest accrued
5,741

 
6,700

Other current liabilities
(138
)
 
1,218

Deferred charges and credits
(1,950
)
 
(16,817
)
Net cash provided by operating activities
218,746

 
176,780

Cash flows from investing activities:
 
 
 
Cash additions to utility property, plant and equipment
(140,367
)
 
(168,830
)
Cash additions to nuclear fuel
(31,618
)
 
(29,929
)
Capitalized interest and AFUDC:
 
 
 
Utility property, plant and equipment
(4,382
)
 
(10,031
)
Nuclear fuel and other
(3,831
)
 
(3,738
)
Allowance for equity funds used during construction
2,209

 
5,867

Decommissioning trust funds:
 
 
 
Purchases, including funding of $3.4 million
(80,785
)
 
(66,463
)
Sales and maturities
76,498

 
60,165

Proceeds from sale of property, plant and equipment

 
3,251

Other investing activities
(204
)
 
3,383

Net cash used for investing activities
(182,480
)
 
(206,325
)
Cash flows from financing activities:
 
 
 
Dividends paid
(39,747
)
 
(37,021
)
Borrowings under the revolving credit facility:
 
 
 
Proceeds
532,332

 
269,977

Payments
(446,005
)
 
(356,523
)
Payment on maturing senior notes
(50,000
)
 

Payment on maturing pollution control bond
(33,300
)
 

Proceeds from issuance of senior notes

 
157,052

Other financing activities
(906
)
 
(2,045
)
Net cash provided by (used for) financing activities
(37,626
)
 
31,440

Net increase (decrease) in cash and cash equivalents
(1,360
)
 
1,895

Cash and cash equivalents at beginning of period
8,420

 
8,149

Cash and cash equivalents at end of period
$
7,060

 
$
10,044


See accompanying notes to financial statements.

 
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Table of Contents

EL PASO ELECTRIC COMPANY
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, 2016 ("2016 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the 2016 Form 10-K. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at September 30, 2017 and December 31, 2016; the results of its operations and comprehensive operations for the three, nine and twelve months ended September 30, 2017 and 2016; and its cash flows for the nine months ended September 30, 2017 and 2016. The results of operations and comprehensive operations for the three and nine months ended September 30, 2017 and 2016, and the cash flows for the nine months ended September 30, 2017 and 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 ("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 ("GAAP").
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates on an on-going basis, including those related to depreciation, unbilled revenue, income taxes, fuel costs, pension and other post-retirement obligations and asset retirement obligations ("ARO"). Actual results could differ from those estimates.
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 customer's 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 $29.9 million at September 30, 2017 and $21.0 million at December 31, 2016. The Company presents revenues net of sales taxes in its statements of operations.
Depreciation. The Company routinely evaluates the depreciable service lives, cost of removal and salvage values of its property, plant and equipment. Depreciation is provided on a straight-line basis over the estimated remaining lives of the assets (ranging in average from 5 to 48 years). When mass-asset property is retired or otherwise disposed of in the normal course of business, its cost, together with the cost of removal, less salvage, is charged to accumulated depreciation. For other property dispositions, the applicable cost and accumulated depreciation is removed from the balance sheet accounts and a gain or loss is recognized.
New Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards either as equity or liabilities, and classification on the statements of cash flows. The Company adopted the new standard effective January 1, 2017. The adoption of the new standard did not have a material impact on the Company’s financial condition, results of operations or cash flows. The cumulative effect of the adoption of the new standard was to increase net operating loss carryforward deferred tax assets and retained earnings by $0.2 million on January 1, 2017.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) to provide a framework that replaces the existing revenue recognition guidance, and has since modified the standard with several ASUs. The standard provides that an entity should recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. More specifically, the standard requires entities to recognize revenue through the application of a five-step model, which includes the: (i) identification of the contract; (ii) identification of the performance obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) the recognition of revenue

 
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Table of Contents
EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


as the entity satisfies the performance obligations. The Company plans to adopt the new standard for reporting periods beginning after December 15, 2017. The Company currently anticipates using the modified retrospective approach.
The Company is currently in the process of evaluating the impact of the new standard on its various revenue and cash flow streams, including the evaluation of the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance. Tariff sales to customers are determined to be in the scope of the new standard and represent a significant portion of the Company's total operating revenues. The Company currently expects that the timing or pattern of revenue recognition from tariff sales will not significantly change. The Company's evaluation of other revenue streams is ongoing. The Company's initial assessments may change as it executes its implementation plan and new guidance is provided by the American Institute of Certified Public Accountants Power and Utilities Industry Task Force. The completion of these assessments could impact current accounting policies, revenue recognition and disclosures in the notes to the financial statements.
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 generally 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. The guidance for classifying and measuring investments in debt securities and loans is not changed by this ASU, but requires entities to record changes in other comprehensive income. Financial assets and financial liabilities must be separately presented by measurement category 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 provisions of this ASU become effective for reporting periods beginning after December 15, 2017. Upon adoption of the new standard, the Company expects to record the cumulative effects as of January 1, 2018 which will result in an adjustment to accumulated other comprehensive income (losses) and retained earnings for unrealized gains (losses) related to equity securities owned by the Company. The Company is continuing to assess 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 lease guidance for capital leases and operating leases. The impact of leases reported in the Company's operating results and statement of cash flows is expected to be similar to previous GAAP. ASU 2016-02 requires the recognition in the statement of financial position, by the lessee, of a liability to make lease payments (lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. How leases are recorded in regard to financial position represents a significant change from previous GAAP guidance. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. Implementation of the standard will be required for reporting periods beginning after December 15, 2018. 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 in the process of evaluating the impact of the new standard, which includes continuing to monitor activities of the FASB related to industry specific issues, including the impact of the recently proposed practical expedient related to land easements. The Company's evaluation process also includes evaluating the impact, if any, on changes to business processes, systems and controls to support recognition and disclosure under the new guidance; however, at this time the Company is unable to determine the impact this standard will have on the financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU also makes targeted amendments to the current impairment model for available-for-sale debt securities. The provisions in ASU 2016-13 will be required for reporting periods beginning after December 15, 2019. ASU 2016-13 will be applied in a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is implemented. The Company is currently assessing the future impact of ASU 2016-13.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The provisions in ASU 2016-15 will be required for reporting periods beginning after December 15, 2017. ASU 2016-15 will be applied using a retrospective transition method to each period presented. If it is impracticable to apply ASU

 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


2016-15 retrospectively for some of the issues, the amendments for those issues may be applied prospectively as of the earliest date practicable. The Company is currently assessing the future impact of this ASU.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 amends Accounting Standards Codification 715, Compensation - Retirement Benefits, to require companies to present the service cost component of net benefit cost in the income statement line items where compensation cost is reported. Companies will present all other components of net benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The amendments in ASU 2017-07 will be required for reporting periods beginning after December 15, 2017. The amendments in ASU 2017-07 should be applied retrospectively for the income statement presentation of the service cost component and the other components of net benefit costs and prospectively, on and after the effective date, for the capitalization of the service cost component. The Company is currently assessing the future impact of this ASU.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting, to provide guidance about when to account for a change to the terms or conditions of a share-based payment award as a modification. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendments of ASU 2017-09 will be required for reporting periods beginning after December 15, 2017. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company is assessing the future impact of ASU 2017-09; however, it currently does not expect the impact of this ASU to be significant.
Supplemental Cash Flow Disclosures (in thousands)
 
 
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Cash paid for:
 
 
 
 
Interest on long-term debt and borrowings under the revolving credit facility
$
47,412

 
$
46,867

 
Income tax paid, net
1,576

 
3,337

Non-cash investing and financing activities:
 
 
 
 
Sale of interest in Four Corners Generating Station (a)

 
27,720

 
Changes in accrued plant additions
(6,228
)
 
4,277

 
Grants of restricted shares of common stock
1,171

 
1,236

 
Issuance of performance shares
932

 

(a)
The Company sold its interest in Four Corners Generating Station ("Four Corners") in July 2016 for approximately $32.0 million based on book value as defined in the purchase and sale agreement related to the sale. The sales price was adjusted downward by $7.0 million and $19.5 million to reflect Arizona Public Service Company's ("APS") affiliate assumption of the Company's obligation to pay for future plant decommissioning and mine reclamation expense, respectively. The sales price was also adjusted downward by approximately $1.3 million for closing adjustments and other assets and liabilities assumed by APS's affiliate. At the closing of the sale on July 6, 2016, the Company received approximately $4.2 million in cash.


 
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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 September 30, 2017
 
Three Months Ended September 30, 2016
 
 
 
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
$
(24,915
)
 
$
32,296

 
$
(11,514
)
 
$
(4,133
)
 
$
(30,532
)
 
$
28,925

 
$
(11,693
)
 
$
(13,300
)
 
Other comprehensive income before reclassifications

 
4,768

 

 
4,768

 

 
3,493

 

 
3,493

 
Amounts reclassified from accumulated other comprehensive income (loss)
(457
)
 
(1,413
)
 
85

 
(1,785
)
 
(804
)
 
(1,687
)
 
(39
)
 
(2,530
)
Balance at end of period
$
(25,372
)
 
$
35,651

 
$
(11,429
)
 
$
(1,150
)
 
$
(31,336
)
 
$
30,731

 
$
(11,732
)
 
$
(12,337
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
 
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
$
(23,928
)
 
$
28,463

 
$
(11,651
)
 
$
(7,116
)
 
$
(29,869
)
 
$
27,765

 
$
(11,810
)
 
$
(13,914
)
 
Other comprehensive income before reclassifications

 
14,491

 

 
14,491

 

 
7,459

 

 
7,459

 
Amounts reclassified from accumulated other comprehensive income (loss)
(1,444
)
 
(7,303
)
 
222

 
(8,525
)
 
(1,467
)
 
(4,493
)
 
78

 
(5,882
)
Balance at end of period
$
(25,372
)
 
$
35,651

 
$
(11,429
)
 
$
(1,150
)
 
$
(31,336
)
 
$
30,731

 
$
(11,732
)
 
$
(12,337
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended September 30, 2017
 
Twelve Months Ended September 30, 2016
 
 
 
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
$
(31,336
)
 
$
30,731

 
$
(11,732
)
 
$
(12,337
)
 
$
(34,105
)
 
$
25,769

 
$
(11,887
)
 
$
(20,223
)
 
Other comprehensive income before reclassifications
7,363

 
13,936

 

 
21,299

 
3,777

 
12,058

 

 
15,835

 
Amounts reclassified from accumulated other comprehensive income (loss)
(1,399
)
 
(9,016
)
 
303

 
(10,112
)
 
(1,008
)
 
(7,096
)
 
155

 
(7,949
)
Balance at end of period
$
(25,372
)
 
$
35,651

 
$
(11,429
)
 
$
(1,150
)
 
$
(31,336
)
 
$
30,731

 
$
(11,732
)
 
$
(12,337
)

 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


Amounts reclassified from Accumulated Other Comprehensive Income (Loss) for the three, nine and twelve months ended September 30, 2017 and 2016 are as follows (in thousands):
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Twelve Months Ended September 30,
 
Affected Line Item in the Statement of Operations
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of pension and post-retirement benefit costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service benefit
 
$
2,414

 
$
1,663

 
$
7,243

 
$
4,993

 
$
9,657

 
$
6,636

 
(a)
 
Net loss
 
(1,695
)
 
(1,087
)
 
(5,083
)
 
(3,532
)
 
(6,516
)
 
(5,688
)
 
(a)
 
 
 
 
719

 
576

 
2,160

 
1,461

 
3,141

 
948

 
(a)
 
Income tax effect
 
(262
)
 
228

 
(716
)
 
6

 
(1,742
)
 
60

 
Income tax (benefit) expense
 
 
 
 
457

 
804

 
1,444

 
1,467

 
1,399

 
1,008

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gain on sale of securities
 
1,765

 
2,072

 
9,122

 
5,570

 
11,192

 
8,797

 
Investment and interest income, net
 
 
 
 
1,765

 
2,072

 
9,122

 
5,570

 
11,192

 
8,797

 
Income before income taxes
 
Income tax effect
 
(352
)
 
(385
)
 
(1,819
)
 
(1,077
)
 
(2,176
)
 
(1,701
)
 
Income tax benefit
 
 
 
 
1,413

 
1,687

 
7,303

 
4,493

 
9,016

 
7,096

 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on cash flow hedge:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of loss
 
(134
)
 
(126
)
 
(396
)
 
(371
)
 
(523
)
 
(490
)
 
Interest on long-term debt and revolving credit facility
 
 
 
 
(134
)
 
(126
)
 
(396
)
 
(371
)
 
(523
)
 
(490
)
 
Loss before income taxes
 
Income tax effect
 
49

 
165

 
174

 
293

 
220

 
335

 
Income tax expense
 
 
 
 
(85
)
 
39

 
(222
)
 
(78
)
 
(303
)
 
(155
)
 
Net (loss) income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
$
1,785

 
$
2,530

 
$
8,525

 
$
5,882

 
$
10,112

 
$
7,949

 
 
 
 
(a) These items are included in the computation of net periodic benefit cost. See Note I, Employee Benefits, for additional information.

 
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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 Energy 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
2015 Texas Retail Rate Case Filing. On August 10, 2015, the Company filed with the City of El Paso, other municipalities incorporated in its Texas service territory, and the PUCT in Docket No. 44941, a request for an annual increase in non-fuel base revenues ("2015 Texas Retail Rate Case").
On July 21, 2016, the parties to PUCT Docket No. 44941 filed the Joint Motion to Implement Uncontested Amended and Restated Stipulation and Agreement which was unopposed by the parties ("2016 Unopposed Settlement"). On August 25, 2016, the PUCT approved the 2016 Unopposed Settlement and issued its final order in Docket No. 44941 ("2016 PUCT Final Order"), as proposed. The 2016 PUCT Final Order provided for: (i) an annual non-fuel base rate increase, lower annual depreciation expense, a revised return on equity for allowance for funds used during construction ("AFUDC") purposes, and the inclusion of substantially all new plant in service in rate base; (ii) an additional annual non-fuel base rate increase of $3.7 million related to Four Corners costs, which was collected through a surcharge that terminated on July 11, 2017; (iii) removing the separate rate treatment for residential customers with solar systems that the Company had proposed in its August 10, 2015 filing; (iv) allowing the Company to recover $3.1 million in rate case expenses through a separate surcharge; and (v) allowing the Company to recover revenues associated with the relate back of rates to consumption on and after January 12, 2016 through March 31, 2016 through a separate surcharge.
Interim rates associated with the annual non-fuel base rate increase became effective on April 1, 2016. The additional surcharges associated with the incremental Four Corners costs, rate case expenses and the relate back of rates to consumption on and after January 12, 2016 through March 31, 2016 were implemented on October 1, 2016.
For financial reporting purposes, the Company deferred any recognition of the Company's request in its 2015 Texas Retail Rate Case until it received the 2016 PUCT Final Order on August 25, 2016. Accordingly, it reported in the third quarter of 2016 the cumulative effect of the 2016 PUCT Final Order which related back to January 12, 2016.
2017 Texas Retail Rate Case Filing. On February 13, 2017, the Company filed with the City of El Paso, other municipalities incorporated in the Company's Texas service territory and the PUCT in Docket No. 46831, a request for an increase in non-fuel base revenues of approximately $42.5 million. On May 16, 2017, the Company filed a motion to sever rate case expense issues from the main rate case. The request was approved by the Administrative Law Judges ("ALJs"), initiating Docket No. 47228, on June 5, 2017.
On July 21, 2017, the Company filed its rebuttal testimony modifying the requested increase to $39.2 million. The decrease from the original request related primarily to the transfer of the recovery of $3.0 million of the rate case expenses to a separate proceeding as noted above. The Company requested, pursuant to its statutory right, to have its new rates relate back for consumption on and after July 18, 2017, which was the 155th day after the filing of the rate case. The difference in rates that would have been billed will be surcharged or refunded to customers after the PUCT's final order is issued in Docket No. 46831. The PUCT has the authority to require the Company to surcharge or refund such difference over a period not to exceed 18 months.
On November 2, 2017 the Joint Motion to Implement Uncontested Stipulation and Agreement ("2017 Unopposed Settlement") was filed with the ALJs for the Company's rate case pending in Docket No. 46831. Key terms of the 2017 Unopposed Settlement include: (i) an annual non-fuel base rate increase of $14.5 million; (ii) a return on equity of 9.65%; (iii) a determination that all new plant in service was prudent and used and useful and therefore is included in rate base; and (iv) allowing the Company to recover approximately $3.4 million in rate case expenses incurred through August 2017, through a separate surcharge over a three-year period. The 2017 Unopposed Settlement also establishes baseline revenue requirements for recovery of future transmission and distribution investment costs and includes a minimum monthly bill of $30.00 for new residential customers with distributed

 
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)


generation, such as private rooftop solar. Additionally, the 2017 Unopposed Settlement allows for the annual recovery of $2.1 million of nuclear decommissioning funding and establishes annual depreciation expense that is approximately $1.9 million lower than the annual amount requested by the Company in its initial filing.
The filing with the ALJs requested that they return the case to the PUCT for approval. A final PUCT order ("Final Order") in the 2017 Texas retail rate case is expected to be issued in the fourth quarter of 2017.
The Company did not recognize the impacts of the 2017 Unopposed Settlement in the Statements of Operations for the third quarter of 2017 because the Final Order has not yet been issued by the PUCT. At this time, the Company believes the revenue and other impacts of the 2017 Unopposed Settlement for financial reporting purposes will be recognized during the fourth quarter of 2017, which is when the Final Order is expected to be issued by the PUCT. Regardless of when the Final Order is issued by the PUCT, the new rates are expected to relate back to consumption on or after July 18, 2017.
Energy Efficiency Cost Recovery Factor. On May 1, 2017, the Company filed its annual application, which was assigned PUCT Docket No. 47125, to establish its energy efficiency cost recovery factor for 2018. In addition to projected energy efficiency costs for 2018 and a true-up to prior year actual costs, the Company requested approval of a $1.0 million bonus for the 2016 energy efficiency program results in accordance with PUCT rules. On August 2, 2017, the Company filed an agreed motion to request suspension of the schedule in the case to allow the parties to pursue settlement. The hearing on the merits of this case was scheduled to begin on August 15, 2017, but has been continued pending possible settlement. The Company cannot predict the outcome of this matter at this time.
Fuel and Purchased Power Costs. On November 30, 2016, the Company filed a request, which was assigned PUCT Docket No. 46610, to increase its fixed fuel factor by approximately 28.8% to reflect increased fuel expenses primarily related to an increase in the price of natural gas used to generate power. The increase in the fixed fuel factor was effective on an interim basis January 1, 2017 and approved by the PUCT on January 10, 2017. As of September 30, 2017, the Company had over-recovered fuel costs in the amount of $1.1 million for the Texas jurisdiction. On October 13, 2017, the Company filed a request to decrease the Texas fixed fuel factor by approximately 19% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. The decrease in the Texas fixed fuel factor became effective beginning with the November 2017 billing month and will continue thereafter until changed by the PUCT.
Fuel Reconciliation Proceeding. On September 27, 2016, the Company filed an application with the PUCT, designated as PUCT Docket No. 46308, to reconcile $436.6 million of Texas fuel and purchased power expenses incurred during the period of April 1, 2013 through March 31, 2016. On June 29, 2017, the PUCT approved a settlement in this proceeding. The settlement provides for the reconciliation of fuel and purchased power costs incurred from April 1, 2013 through March 31, 2016. Additionally, the settlement modifies and tightens the Palo Verde Nuclear Generating Station ("Palo Verde") performance rewards measurement bands beginning with the 2018 performance period. The financial results for the nine months ended September 30, 2017 include a $5.0 million, pre-tax increase to income reflecting the settlement of the Texas fuel reconciliation proceeding. This amount includes Palo Verde performance rewards associated with the 2013 to 2015 performance periods net of disallowed fuel and purchased power costs as approved in the settlement. As of September 30, 2017, Texas jurisdictional fuel and purchased power costs subject to a future Texas fuel reconciliation are approximately $223.3 million.
Community Solar. On June 8, 2015, the Company filed a petition with the PUCT to initiate a community solar program that includes the construction and ownership of a 3 MW solar photovoltaic system located at the Company's Montana Power Station. 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 filed a settlement agreement among all parties on July 1, 2016 approving the program, and the PUCT approved the settlement agreement and program on September 1, 2016. On April 19, 2017, the Company announced that the entire 3 MW program was fully subscribed by approximately 1,500 Texas customers. The Community Solar facility began commercial operation on May 31, 2017.
Four Corners Generating Station. On February 17, 2015, the Company and APS entered into an asset purchase agreement ("Purchase and Sale Agreement") providing for the sale of the Company's interest in Four Corners to APS. The sale of the Company's interest in Four Corners closed on July 6, 2016.
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. This case was assigned PUCT Docket No. 44805. Subsequent to the filing of the application, the case was subject to numerous procedural matters, including a March 23, 2016 order in which 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 coal mine reclamation costs, in a rate case proceeding. On September 1, 2016,

 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


a motion by parties in the proceeding to suspend the procedural schedule in order to pursue settlement was approved. On March 3, 2017, the Company filed a Joint Motion to Implement Stipulation and Agreement ("Stipulation and Agreement"), and PUCT Staff filed its recommendation that the Company’s disposition of its interest in Four Corners was reasonable and consistent with the public interest. Additionally, the signatories of the Stipulation and Agreement agreed to support the recovery of the Company's Four Corners decommissioning costs in the 2017 Texas retail rate case. A final order approving the Stipulation and Agreement was adopted by the PUCT on March 30, 2017.
Other Required Approvals. The Company has obtained other required approvals for tariffs and approvals required by the Public Utility Regulatory Act ("PURA") and the PUCT.
New Mexico Regulatory Matters
2015 New Mexico Rate Case Filing. On May 11, 2015, the Company filed a request with the NMPRC, in Case No. 15-00127-UT, for an annual increase in non-fuel base rates. On June 8, 2016, the NMPRC issued its final order in Case No. 15-00127-UT ("NMPRC Final Order"), which approved an annual increase in non-fuel base rates of approximately $0.6 million, an increase of approximately $0.5 million in other service fees and a decrease in the Company's allowed return on equity to 9.48%. The NMPRC Final Order concluded that all of the Company's new plant in service was reasonable and necessary and therefore would be recoverable in rates. The Company's rates were approved by the NMPRC effective July 1, 2016 and implemented at such time.
Future New Mexico Rate Case Filing. NMPRC Case No. 15-00109-UT required the Company to make a rate filing in New Mexico in the second quarter of 2017 using a historical test year ended December 31, 2016. On March 24, 2017, the Company, NMPRC Utility Division Staff and the New Mexico Attorney General filed a Joint Motion to Modify Filing Date Stated in Final Order requesting that the rate filing date be changed to no later than July 31, 2019, using the appropriate historical test year period. The joint request was approved by the NMPRC on April 12, 2017.
Fuel and Purchased Power Costs. Historically, fuel and purchased power costs were recovered through base rates and a Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC") that accounts for changes in the costs of fuel relative to the amount included in base rates. Effective July 1, 2016, with the implementation of the final order in Case No. 15-00127-UT, fuel and purchased power costs are no longer recovered through base rates but are recovered through the FPPCAC. The Company's request to reconcile its fuel and purchased power costs for the period January 1, 2013 through December 31, 2014 was approved in Case No. 15-00127-UT. New Mexico jurisdictional costs subject to prudence review are costs from January 1, 2015 through September 30, 2017 that total approximately $160.9 million. At September 30, 2017, the Company had a net fuel over-recovery balance of approximately $1.9 million in New Mexico.
5 MW Holloman Air Force Base ("HAFB") Facility Certificate of Convenience and Necessity ("CCN"). On October 7, 2015, in NMPRC Case No. 15-00185-UT, the NMPRC issued a final order approving a CCN for a 5 MW solar power generation facility located on HAFB in the Company's service territory in New Mexico. The Company and HAFB negotiated a retail contract, which includes power sales agreement for the facility, to replace the existing load retention agreement which was approved by final order issued October 5, 2016 in NMPRC Case No. 16-00224-UT. Construction of the solar generation facility is expected to be completed in the third quarter of 2018.
New Mexico Efficient Use of Energy Recovery Factor. On July 1, 2016, the Company filed its annual application requesting approval of its 2017 Energy Efficiency and Load Management Plan and to establish energy efficiency cost recovery factors for 2017. In addition to projected energy efficiency costs for 2017, the Company requested approval of a $0.4 million incentive for 2017 energy efficiency programs in accordance with NMPRC rules. This case was assigned Case No. 16-00185-UT. On February 22, 2017, the NMPRC issued a Final Order approving the Company’s 2017 Energy Efficiency and Load Management Plan and authorizing recovery in 2017 of a base incentive of $0.4 million. The Company’s energy efficiency cost recovery factors were approved and effective in customer bills beginning on March 1, 2017.
On July 1, 2016, the Company filed its 2015 Annual Report for Energy Efficiency Programs, which included an incentive for verified 2015 program performance of $0.3 million, which was approved in Case No. 13-00176-UT. The Company recorded the $0.3 million approved incentive in operating revenues in the first quarter of 2017. In addition, on June 30, 2017, the Company filed its 2016 Annual Report for Energy Efficiency Programs, which included an incentive for verified 2016 program performance of $0.4 million which was approved in Case No. 13-00176-UT. The Company recorded the $0.4 million approved incentive in operating revenues in the third quarter of 2017.
Revolving Credit Facility, Issuance of Long-Term Debt, and Securities Financing. On October 7, 2015, the Company received approval from the NMPRC to guarantee the issuance of up to $65.0 million of long-term debt by the Rio Grande Resources Trust

 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


("RGRT") to finance future purchases of nuclear fuel and to refinance existing nuclear fuel debt obligations, for which the approval remains effective. On October 4, 2017, the Company received additional approval in NMPRC Case No. 17-00217-UT to amend and extend its Revolving Credit Facility ("RCF"), issue up to $350.0 million in long-term debt and to redeem and refinance the $63.5 million 2009 Series A 7.25% Pollution Control Bonds and the $37.1 million 2009 Series B 7.25% Pollution Control Bonds, which are subject to optional redemption in 2019. The NMPRC approval to issue $350.0 million in long-term debt supersedes prior approval.
Other Required Approvals. The Company has obtained other required approvals for other tariffs and other approvals as required by the NMPRC.
Federal Regulatory Matters
Revolving Credit Facility, Issuance of Long-Term Debt, Securities Financing, and Guarantee of Debt. On October 31, 2017, the FERC issued an order in Docket No. ES17-54-000 approving the Company's filing to (i) amend and extend the RCF; (ii) issue up to $350.0 million in long-term debt; (iii) guarantee the issuance of up to $65.0 million of long-term debt by the RGRT; and (iv) redeem and refinance the $63.5 million 2009 Series A 7.25% Pollution Control Bonds and the $37.1 million 2009 Series B 7.25% Pollution Control Bonds, which are subject to optional redemption in 2019. The order also approves the Company's request to continue to utilize the Company's existing RCF with the ability to amend and extend at a future date. The authorization is effective from November 15, 2017 through November 14, 2019 and supersedes prior approvals.
The Company has obtained required approvals for rates, tariffs and other approvals as required by the FERC.
D. Palo Verde
Decommissioning. Pursuant to the Arizona Nuclear Power Project ("ANPP") Participation Agreement and federal law, the Company funds its share of the estimated costs to decommission Palo Verde Units 1, 2 and 3, including the Common Facilities, through the term of their respective operating licenses and is required to maintain a minimum accumulation and funding level in its decommissioning account at the end of each annual reporting period during the life of the plant. The Company has established external trusts with an independent trustee, which enables the Company to record a current deduction for federal income tax purposes for most of the amounts funded. At September 30, 2017, the Company’s decommissioning trust fund had a balance of $278.1 million, which is above its minimum funding level. The Company monitors the status of its decommissioning funds and adjusts its deposits, if necessary.
Decommissioning costs are estimated every three years based upon engineering cost studies performed by outside engineers retained by APS. In April 2017, the Palo Verde Participants approved the 2016 Palo Verde decommissioning study (“2016 Study”). The 2016 Study estimated that the Company must fund approximately $432.8 million (stated in 2016 dollars) to cover its share of decommissioning costs which was an increase in decommissioning costs of $52.1 million (stated in 2016 dollars) from the 2013 Palo Verde decommissioning study. The effect of this change increased the ARO by $3.5 million, which was recorded during the second quarter of 2017, and will increase annual expenses starting in April 2017. Although the 2016 Study was based on the latest available information, there can be no assurance that decommissioning cost estimates will not increase in the future or that regulatory requirements will not change. In addition, until a new low-level radioactive waste repository opens and operates for a number of years, estimates of the cost to dispose of low-level radioactive waste are subject to uncertainty. As provided in the ANPP Participation Agreement, the participants are required to conduct a new decommissioning study every three years. While the Company attempts to seek amounts in rates to meet its decommissioning obligations, it is not able to conclude given the evidence available to it now that it is probable these costs will continue to be collected over the period until decommissioning begins in 2044. The Company is ultimately responsible for these costs and its future actions combined with future decisions from regulators will determine how successful the Company is in this effort.
Spent Nuclear Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987 ("NWPA"), the U.S. Department of Energy ("DOE") is legally obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive waste generated by all domestic power reactors by 1998. The DOE's obligations are reflected in a contract for Disposal of Spent Nuclear Fuel and/or High-Level Radioactive Waste ("Standard Contract") with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998.
On November 2, 2015, APS, acting on behalf of itself and the Palo Verde Participants, submitted to the government a request for reimbursement of spent nuclear fuel storage costs for $12.0 million for the period July 1, 2014 through June 30, 2015. In

 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


February 2016, the DOE notified APS of the approval of the claim. In March 2016, the Company received its share of this claim of approximately $1.9 million, of which $1.6 million was credited to customers through the applicable fuel adjustment clauses.
On October 31, 2016, APS filed an $11.3 million claim for the period July 1, 2015 through June 30, 2016. On February 1, 2017, the DOE notified APS of the approval of the claim. On March 10, 2017, the Company received approximately $1.8 million, representing its share of the award, of which $1.4 million was credited to customers through the applicable fuel adjustment clauses.
On October 31, 2017, APS filed a $9.0 million claim for the period July 1, 2016 through June 30, 2017. The Company's share of this claim is approximately $1.4 million. Any reimbursement is anticipated to be received in the first quarter of 2018, and the majority will be credited to customers through the applicable fuel adjustment clauses.
Palo Verde Operations and Maintenance Expense. Included in other operations and maintenance expenses are expenses associated with Palo Verde as follows (in thousands):
 
 
2017
 
2016
Three months ended September 30,
 
$
20,441

 
$
21,123

Nine months ended September 30,
 
67,980

 
67,514

Twelve months ended September 30,
 
97,380

 
97,451


 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


E. Common Stock
Dividends. The Company paid $13.6 million and $12.5 million in quarterly cash dividends during the three months ended September 30, 2017 and 2016, respectively. The Company paid a total of $39.7 million and $52.3 million in quarterly cash dividends during the nine and twelve months ended September 30, 2017, respectively. The Company paid a total of $37.0 million and $49.0 million in quarterly cash dividends during the nine and twelve months ended September 30, 2016, respectively. On October 26, 2017, the Board of Directors declared a quarterly cash dividend of $0.335 per share payable on December 29, 2017 to shareholders of record as of the close of business on December 15, 2017.
Basic and Diluted Earnings Per Share. The basic and diluted earnings per share are presented below (in thousands except for share data):
 
Three Months Ended September 30,
 
2017
 
2016
Weighted average number of common shares outstanding:
 
 
 
Basic number of common shares outstanding
40,427,589

 
40,363,819

Dilutive effect of unvested performance awards
123,726

 
62,123

Diluted number of common shares outstanding
40,551,315

 
40,425,942

Basic net income per common share:
 
 
 
Net income
$
59,684

 
$
74,636

Income allocated to participating restricted stock
(234
)
 
(232
)
Net income available to common shareholders
$
59,450

 
$
74,404

Diluted net income per common share:
 
 
 
Net income
$
59,684

 
$
74,636

Income reallocated to participating restricted stock
(234
)
 
(232
)
Net income available to common shareholders
$
59,450

 
$
74,404

Basic net income per common share:
 
 
 
Distributed earnings
$
0.335

 
$
0.31

Undistributed earnings
1.135

 
1.53

Basic net income per common share
$
1.470

 
$
1.84

Diluted net income per common share:
 
 
 
Distributed earnings
$
0.335

 
$
0.31

Undistributed earnings
1.135

 
1.53

Diluted net income per common share
$
1.470

 
$
1.84


 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


 
Nine Months Ended September 30,
 
2017
 
2016
Weighted average number of common shares outstanding:
 
 
 
Basic number of common shares outstanding
40,408,100

 
40,344,834

Dilutive effect of unvested performance awards
108,677

 
50,977

Diluted number of common shares outstanding
40,516,777

 
40,395,811

Basic net income per common share:
 
 
 
Net income
$
91,761

 
$
91,112

Income allocated to participating restricted stock
(354
)
 
(271
)
Net income available to common shareholders
$
91,407

 
$
90,841

Diluted net income per common share:
 
 
 
Net income
$
91,761

 
$
91,112

Income reallocated to participating restricted stock
(354
)
 
(271
)
Net income available to common shareholders
$
91,407

 
$
90,841

Basic net income per common share:
 
 
 
Distributed earnings
$
0.98

 
$
0.915

Undistributed earnings
1.28

 
1.335

Basic net income per common share
$
2.26

 
$
2.250

Diluted net income per common share:
 
 
 
Distributed earnings
$
0.98

 
$
0.915

Undistributed earnings
1.28

 
1.335

Diluted net income per common share
$
2.26

 
$
2.250



 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


 
Twelve Months Ended September 30,
 
2017
 
2016
Weighted average number of common shares outstanding:
 
 
 
Basic number of common shares outstanding
40,398,022

 
40,332,835

Dilutive effect of unvested performance awards
100,620

 
47,608

Diluted number of common shares outstanding
40,498,642

 
40,380,443

Basic net income per common share:
 
 
 
Net income
$
97,417

 
$
91,760

Income allocated to participating restricted stock
(387
)
 
(264
)
Net income available to common shareholders
$
97,030

 
$
91,496

Diluted net income per common share:
 
 
 
Net income
$
97,417

 
$
91,760

Income reallocated to participating restricted stock
(387
)
 
(264
)
Net income available to common shareholders
$
97,030

 
$
91,496

Basic net income per common share:
 
 
 
Distributed earnings
$
1.29

 
$
1.21

Undistributed earnings
1.11

 
1.06

Basic net income per common share
$
2.40

 
$
2.27

Diluted net income per common share:
 
 
 
Distributed earnings
$
1.29

 
$
1.21

Undistributed earnings
1.11

 
1.06

Diluted net income per common share
$
2.40

 
$
2.27



The number of restricted stock awards and performance shares at 100% performance level excluded from the calculation of the diluted number of common shares outstanding because their effect was antidilutive is presented below:
 
Three Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Restricted stock awards
71,052

 
57,633

 
69,290

 
53,285

 
65,707

 
50,854

Performance shares (a)

 
62,995

 

 
62,995

 

 
62,995

________________________
(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.

 
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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, Arizona and New Mexico jurisdictions for years prior to 2012. In August 2017, the Company reached an agreement with the Texas Comptroller of Public Accounts and settled audits in Texas for tax years 2007 through 2011.
For the three months ended September 30, 2017 and 2016, the Company’s effective tax rate was 35.3% and 36.6%, respectively. For the nine months ended September 30, 2017 and 2016, the Company's effective tax rate was 35.3% and 36.1%, respectively. For the twelve months ended September 30, 2017 and 2016, the Company's effective tax rate was 35.0% and 35.8%, respectively. The Company's effective tax rate for all periods 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%, the allowance for equity funds used during construction ("AEFUDC"), state taxes, changes in tax reserves discussed below and the issue discussed in the following paragraph.
In the third quarter of 2016, the Company changed its accounting for state income taxes from the flow-through method to the normalization method in accordance with the PUCT's and NMPRC's most recent final orders. Under the flow-through method, the Company previously recorded deferred state income taxes and regulatory liabilities and assets offsetting such deferred state income taxes at the expected cash flow to be reflected in future rates. Upon implementation of normalization, the Company began amortizing the net regulatory asset for deferred state income taxes to deferred income tax expense over a 15 year period as allowed by the regulators. In the third quarter of 2016, the Company began recording deferred state income tax expense as required by normalization, retroactive to January 2016 as provided in the final orders. The impact of the change was additional deferred income tax expense of $0.1 million, $1.4 million and $2.2 million for the three, nine and twelve months ended September 30, 2017, respectively.
FASB guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recorded a reduction in the unrecognized tax position of $1.5 million in the three months ended September 30, 2017, $1.7 million in the nine months ended September 30, 2017, and $0.9 million in the three months ended September 30, 2016, related to transmission and distribution costs and other amounts deducted in prior year Texas franchise tax returns. The Company recorded an increase of $0.4 million in the three months ended September 30, 2017 related to depreciation issues in the current year Texas franchise tax return. The Company recorded a decrease of $0.3 million in the first quarter of 2016 related to tax credits taken and apportionment factors used in prior year Arizona income tax returns, which have been settled through audit. A reconciliation of the September 30, 2017 and 2016 amounts of unrecognized tax benefits are as follows (in thousands):
 
 
2017
 
2016
Balance at January 1
$
5,300

 
$
6,000

 
Additions for tax positions related to the current year
400

 

 
Reductions for tax positions related to the current year

 

 
Additions for tax positions related to prior years

 

 
Reductions for tax positions related to prior years
(1,700
)
 
(1,200
)
Balance at September 30
$
4,000

 
$
4,800


G. Commitments, Contingencies and Uncertainties
For a full discussion of commitments and contingencies, see Note K of the Notes to Financial Statements in the 2016 Form 10-K. In addition, see Notes C and D above and Notes C and E of the Notes to Financial Statements in the 2016 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.



 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


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 the Notes to Financial Statements in the 2016 Form 10-K.
Environmental Matters
General. The Company is subject to extensive laws, regulations and permit requirements with respect to air and greenhouse gas ("GHG") 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.
On March 28, 2017 the Company entered into a Compliance Agreement (“Compliance Agreement”) with the Texas Commission on Environmental Quality under the Texas Environmental, Health and Safety Audit Privilege Act to address certain water and waste compliance issues associated with the integrity of the synthetic liner of the evaporation pond at the Company’s Newman Generating Station. The Company's action plan was initiated in the second quarter of 2017 and will continue to be implemented over the three year period of the Compliance Agreement. The Company is currently evaluating the cost of performing its obligations under the Compliance Agreement.
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 2016 Form 10-K for discussion of the effects of government legislation and regulation on the Company.

 
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EL PASO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)


I. Employee Benefits
Retirement Plans
The net periodic benefit cost recognized for the three, nine and twelve months ended September 30, 2017 and 2016 is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2017
 
2016
 
2017

2016
 
2017
 
2016
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
2,129

 
$
2,191

 
$
6,388

 
$
6,001

 
$
8,388

 
$
8,199

Interest cost
3,264

 
3,250

 
9,794

 
9,780

 
13,053

 
13,403

Expected return on plan assets
(4,797
)
 
(4,734
)
 
(14,392
)
 
(14,159
)
 
(19,112
)
 
(19,108
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Net loss
2,114

 
1,730

 
6,341

 
5,505

 
8,175

 
8,167

Prior service benefit
(877
)
 
(875
)
 
(2,630
)
 
(2,630
)
 
(3,506
)
 
(3,506
)
Net periodic benefit cost
$
1,833

 
$
1,562

 
$
5,501

 
$
4,497

 
$
6,998

 
$
7,155

During the nine months ended September 30, 2017, the Company contributed $9.4 million of its projected $10.0 million 2017 annual contribution to its retirement plans.
Other Postretirement Benefits
The net periodic benefit recognized for the three, nine and twelve months ended September 30, 2017 and 2016 is made up of the components listed below (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Components of net periodic benefit:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
559

 
$
749

 
$
1,677

 
$
2,179

 
$
2,267

 
$
3,042

Interest cost
680

 
871

 
2,042

 
2,616

 
2,593

 
3,625

Expected return on plan assets
(477
)
 
(452
)
 
(1,430
)
 
(1,372
)
 
(1,893
)
 
(1,889
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
Prior service benefit
(1,537
)
 
(788
)
 
(4,613
)
 
(2,363
)
 
(6,151
)
 
(3,130
)
Net gain
(419
)
 
(643
)
 
(1,258
)
 
(1,973
)
 
(1,659
)
 
(2,479
)
Net periodic benefit
$
(1,194
)
 
$
(263
)
 
$
(3,582
)
 
$
(913
)
 
$
(4,843
)
 
$
(831
)
During the nine months ended September 30, 2017, the Company contributed $0.3 million of its projected $0.5 million 2017 annual contribution to its other postretirement 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.

 
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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): 
</