El Paso Electric Announces Fourth Quarter and Annual 2017 Financial Results

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

Overview

• For the fourth quarter of 2017, El Paso Electric Company ("EE" or the
  "Company") reported net income of $6.5 million, or $0.16 basic and
  diluted earnings per share. In the fourth quarter of 2016, EE reported
  net income of $5.7 million, or $0.14 basic and diluted earnings per
  share.
• For the twelve months ended December 31, 2017, EE reported net income
  of $98.3 million, or $2.42 basic and diluted earnings per share. Net
  income for the twelve months ended December 31, 2016 was $96.8
  million, or $2.39 basic and diluted earnings per share.

"We reached an important milestone in the fourth quarter when the Public
Utility Commission of Texas approved the unopposed settlement in our
2017 Texas rate case," said Mary Kipp, President and Chief Executive
Officer of El Paso Electric Company. "The settlement is the culmination
of several years of dedicated effort and incorporates into our Texas
rates over $1 billion of infrastructure investments, including Montana
Power Station Units 1 through 4. Among other things, the settlement has
a provision to pass through to our Texas customers the tax savings from
the reduction in the federal statutory income tax rate that was recently
enacted. We expect to begin issuing credits to our Texas customers in
the first half of 2018."

Earnings Summary

The table and explanations below present the major factors affecting
fourth quarter and twelve months ended December 31, 2017 net income
relative to fourth quarter and twelve months ended December 31, 2016 net
income, respectively, (in thousands except per share data):

Fourth Quarter 2017

Income for the quarter ended December 31, 2017, when compared to the
quarter ended December 31, 2016, was positively affected by (presented
on a pre-tax basis):

• Increased retail non-fuel base revenues primarily due to the non-fuel
  base rate increase approved by the Public Utility Commission of Texas
  ("PUCT") in its final order in the Company's 2017 Texas retail rate
  case in Docket No. 46831 (the "2017 PUCT Final Order"). The fourth
  quarter of 2017 included approximately $8.8 million of retail non-fuel
  base revenues for the period from July 18, 2017 through December 31,
  2017, which was recognized when the 2017 PUCT Final Order was approved
  in December 2017. Excluding the rate relief impact, retail non-fuel
  base revenues were relatively unchanged. Overall, milder weather
  offset the impacts of customer growth of 1.7%.
• Decreased effective tax rate primarily due to a reduction in Texas
  margin taxes resulting from a settlement with the Texas Comptroller of
  Public Accounts.

Income for the quarter ended December 31, 2017, when compared to the
quarter ended December 31, 2016, was negatively affected by (presented
on a pre-tax basis):

• Increased depreciation and amortization primarily due to increases in
  plant and increased depreciation and amortization of approximately
  $0.7 million associated with the 2017 PUCT Final Order.
• Increased Palo Verde Generating Station ("Palo Verde") operations and
  maintenance ("O&M") expense primarily due to reduced employee pension
  and benefit expenses by Palo Verde in 2016.
• Increased taxes other than income taxes primarily due to increased
  property taxes in Texas and Arizona and increased revenue related
  taxes in Texas.
• Decreased wheeling revenues primarily due to the expiration of a
  contract.
• Decreased allowance for funds used during construction ("AFUDC")
  primarily due to a reduction in the AFUDC rate effective January 2017.
• Increased other primarily due to (i) O&M expenses related to the
  Company's fossil-fuel generating plants and (ii) employee incentive
  compensation and payroll costs compared to the three months ended
  December 31, 2016.

Year to Date 2017

Income for the twelve months ended December 31, 2017, when compared to
the twelve months ended December 31, 2016, was positively affected by
(presented on a pre-tax basis):

• Increased retail non-fuel base revenues primarily due to the non-fuel
  base rate increase approved in the 2017 PUCT Final Order. The fourth
  quarter of 2017 included approximately $8.8 million of retail non-fuel
  base revenues for the period from July 18, 2017 through December 31,
  2017, which were recognized when the 2017 PUCT Final Order was
  approved in December 2017. Excluding the $8.8 million 2017 PUCT Final
  Order impact, for the twelve months ended December 31, 2017, retail
  non-fuel base revenues increased $4.5 million, or 0.7%, compared to
  the twelve months ended December 31, 2016. See "Retail Non-fuel Base
  Revenues" section below for further details.
• Decreased effective tax rate primarily due to a reduction in state
  income taxes primarily due to audit settlements.
• Palo Verde performance rewards, associated with the 2013 to 2015
  performance periods, net of disallowed fuel and purchased power costs
  related to the resolution of the Texas fuel reconciliation proceeding
  designated as PUCT Docket No. 46308 for the period from April 2013
  through March 2016. These rewards were recorded in June 2017 with no
  comparable amount during the twelve months ended December 31, 2016.
• Increased investment and interest income primarily due to higher
  realized gains on securities sold from the Company’s Palo Verde
  decommissioning trust during the twelve months ended December 31, 2017
  compared to the twelve months ended December 31, 2016.

Income for the twelve months ended December 31, 2017, when compared to
the twelve months ended December 31, 2016, was negatively affected by
(presented on a pre-tax basis):

• Decreased AFUDC due to lower balances of construction work in
  progress, primarily due to Montana Power Station ("MPS") Units 3 and 4
  being placed in service in May and September 2016, respectively, and a
  reduction in the AFUDC rate effective January 2017.
• Increased depreciation and amortization primarily due to increases in
  plant, including MPS Units 3 and 4, which were placed in service in
  2016. These increases were partially offset by the sale of the
  Company's interest in the coal-fired Four Corners Generating Station
  ("Four Corners") in July 2016.
• Increased taxes other than income taxes primarily due to increased
  property valuations in Texas as a result of MPS Units 3 and 4 being
  placed in service in 2016 and increased revenue related taxes in Texas.
• Decreased wheeling revenues primarily due to the expiration of a
  contract.
• Increased Palo Verde O&M primarily due to higher administrative and
  general expenses.

Retail Non-fuel Base Revenues

Excluding the $8.8 million 2017 PUCT Final Order impact recognized in
the fourth quarter of 2017, retail non-fuel base revenues for the three
months ended December 31, 2017 were relatively unchanged compared to the
three months ended December 31, 2016. Overall, milder weather offset the
impact of customer growth of 1.7%. Cooling degree days decreased 9.7% in
the three months ended December 31, 2017, when compared to the three
months ended December 31, 2016. Heating degree days decreased 7.0% in
the three months ended December 31, 2017, when compared to the three
months ended December 31, 2016. Non-fuel base revenues and kilowatt-hour
("kWh") sales for the three months ended December 31, 2017 are provided
by customer class on page 12 of this news release.

Excluding the $8.8 million 2017 PUCT Final Order impact, for the twelve
months ended December 31, 2017, retail non-fuel base revenues increased
$4.5 million, or 0.7%, compared to the twelve months ended December 31,
2016. This increase primarily includes (i) a $2.5 million increase in
revenues from residential customers driven by a 1.6% increase in the
average number of residential customers served and (ii) a $2.1 million
increase in revenues from small commercial and industrial customers
driven by a 2.4% increase in the average number of small commercial and
industrial customers served. The Company experienced an overall 1.7%
increase in the average number of customers served and its impact on
revenues was partially offset by milder weather when compared to the
twelve months ended December 31, 2016. Heating degree days decreased
17.8% in the twelve months ended December 31, 2017, when compared to the
twelve months ended December 31, 2016. During our peak summer cooling
season, cooling degree days in 2017 were comparable to the same period
in 2016. Non-fuel base revenues and kWh sales for the twelve months
ended December 31, 2017 are provided by customer class on page 14 of
this news release.

Rate Case

2017 Texas Retail Rate Case

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. On November 2, 2017, the Company filed the Joint Motion to
Implement Uncontested Stipulation and Agreement with the Administrative
Law Judges for the Company's rate case.

On December 18, 2017, the PUCT approved the 2017 PUCT Final Order for
the Company's rate case pending in Docket No. 46831, which provides,
among other things, for the following: (i) an annual non-fuel base rate
increase of $14.5 million; (ii) a return on equity of 9.65%; (iii) all
new plant in service as filed in the Company's rate filing package was
prudent and used and useful and therefore is included in rate base; (iv)
recovery of the costs of decommissioning Four Corners in the amount of
$5.5 million over a seven year period beginning August 1, 2017; (v) the
Company to recover reasonable rate case expenses of approximately $3.4
million through a separate surcharge over a three year period; and (vi)
a requirement that the Company file a refund tariff if the federal
statutory income tax rate, as it relates to the Company, is decreased
before the Company files its next rate case. The 2017 PUCT Final Order
also 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
generation, such as private rooftop solar. Additionally, the 2017 PUCT
Final Order 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. Finally, the 2017 PUCT Final Order
allows for the Company to recover revenues associated with the relate
back of rates to consumption on and after July 18, 2017 through a
separate surcharge.

New base rates, including additional surcharges associated with rate
case expenses and the relate back of rates to consumption on and after
July 18, 2017 through December 31, 2017 were implemented in January 2018.

For financial reporting purposes, the Company deferred any recognition
of the Company's request in its 2017

Texas retail rate case until it received the 2017 PUCT Final Order on
December 18, 2017. Accordingly, it reported in the fourth quarter of
2017 the cumulative effect of the 2017 PUCT Final Order, which related
back to July 18, 2017. Details of the impacts of the 2017 PUCT Final
Order are provided on page 17 of this news release.

Corporate Tax Reform

On December 22, 2017, the President signed into law the Tax Cuts and
Jobs Act of 2017 ("TCJA"), which made widespread changes to the Internal
Revenue Code, including a reduction in the federal corporate income tax
rate from 35% to 21% effective January 1, 2018, and discontinuance of
bonus depreciation for regulated utilities for assets placed in service
after September 27, 2017. Accordingly, the Company reduced its
accumulated deferred income taxes (“ADIT”) liability to reflect the
$298.9 million impact due to the reduction in the federal corporate tax
rate and other changes to the tax law on its December 31, 2017 balance
sheet. The Company offset this reduction by recording a regulatory
liability to reflect the future refund of such amounts related to
changes in ADIT to ratepayers in its Texas, New Mexico and Federal
Energy Regulatory Commission (the "FERC") jurisdictions. The new tax law
change had a minimal impact on the Company’s Statements of Operations
for the three and twelve months ended December 31, 2017.

As noted earlier in this news release under "Rate Case – 2017 Texas
Retail Rate Case," the Company agreed to file a refund tariff if the
federal statutory income tax rate, as it relates to the Company, is
decreased before the Company files its next rate case. Accordingly, the
Company will recognize reduced Texas jurisdictional revenues beginning
January 1, 2018, to approximate the tax savings resulting from the TCJA
and will file a refund tariff which the Company will ask to be
implemented in the first half of 2018. The refund tariff will be updated
annually until new base rates are implemented pursuant to the Company's
next rate case filing.

The Company is required to make its next rate case filing in New Mexico,
which will reflect the Company's new corporate income tax rate, no later
than July 31, 2019. However, the New Mexico Public Regulation Commission
("NMPRC") has initiated an investigation into the impact of the TCJA on
utility customers that may require earlier action by the Company. The
Company is evaluating possible approaches to begin providing a refund
credit for the income tax rate decrease to New Mexico customers.

Capital and Liquidity

We continue to maintain a strong capital structure in which common stock
equity represented 45.5% of our capitalization (common stock equity,
long-term debt, current maturities of long-term debt and short-term
borrowings under our Revolving Credit Facility (the "RCF")) as of
December 31, 2017. At December 31, 2017, we had a balance of $7.0
million in cash and cash equivalents. Based on current projections, we
believe that we will have adequate liquidity through the issuance of
long-term debt, our current cash balances, cash from operations and
available borrowings under the RCF to meet all of our anticipated cash
requirements for the next twelve months.

Cash flows from operations for the twelve months ended December 31, 2017
were $288.6 million, compared to $231.2 million for the twelve months
ended December 31, 2016. The primary factors contributing to the
increase in cash flows from operations were the change in net
over-collection and under-collection of fuel revenues and accounts
receivable. A component of cash flows from operations is the change in
net over-collection and under-collection of fuel revenues. The
difference between fuel revenues collected and fuel expense incurred is
deferred to be either refunded (over-recoveries) or surcharged
(under-recoveries) to customers in the future. During the twelve months
ended December 31, 2017, we had fuel over-recoveries of $17.1 million
compared to under-recoveries of fuel costs of $14.9 million during the
twelve months ended December 31, 2016. At December 31, 2017, we had a
net fuel over-recovery balance of $6.2 million, including an
over-recovery of $5.8 million in Texas and an over-recovery of $0.4
million in New Mexico. On October 13, 2017, we filed a request to
decrease our 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 our Texas fixed fuel
factor became effective beginning with the November 2017 billing month
and will continue thereafter until changed by the PUCT.

During the twelve months ended December 31, 2017, our primary capital
requirements were for the construction and purchase of our electric
utility plant, debt retirements, payments of common stock dividends, and
purchases of nuclear fuel. Capital expenditures for new electric utility
plant were $190.3 million, net of insurance proceeds, for the twelve
months ended December 31, 2017 and $225.4 million for the twelve months
ended December 31, 2016. Capital expenditures for 2018 are expected to
be approximately $236 million. Capital requirements for purchases of
nuclear fuel were $38.5 million for the twelve months ended December 31,
2017, and $42.4 million for the twelve months ended December 31, 2016.

On February 1, 2018, the Board of Directors declared a quarterly cash
dividend of $0.335 per share payable on March 30, 2018 to shareholders
of record as of the close of business on March 16, 2018. On December 29,
2017, we paid a quarterly cash dividend of $0.335 per share, or $13.6
million, to shareholders of record as of the close of business on
December 15, 2017. We paid a total of $53.3 million in cash dividends
during the twelve months ended December 31, 2017. We expect to continue
paying quarterly cash dividends in 2018.

No shares of common stock were repurchased during the twelve months
ended December 31, 2017. As of December 31, 2017, a total of 393,816
shares remain available for repurchase under our currently authorized
stock repurchase program. We may in the future make purchases of our
common stock in open market transactions at prevailing prices and may
engage in private transactions where appropriate.

Our cash requirements for federal and state income taxes vary from year
to year based on taxable income, which is influenced by the timing of
revenues and expenses recognized for income tax purposes. The following
summary describes the major impacts of the TCJA on our liquidity. We
continue to evaluate the TCJA and have made assumptions based on
information currently available.

The TCJA discontinued bonus depreciation for regulated utilities which
reduced tax deductions previously available to us for 2017, 2018 and
2019. The decrease in tax deductions results in the utilization of our
net operating loss carryforwards (“NOL carryforwards”) approximately two
years earlier than anticipated and is expected to result in higher
income tax payments beginning in 2019, after the full utilization of NOL
carryforwards. However, due to the lower corporate income tax rate
enacted by the TCJA, our future tax payments will be made at the reduced
rate of 21% beginning in 2018. Due to NOL carryforwards, minimal tax
payments are expected for 2018, which are mostly related to state income
taxes.

However, we expect that the effect of the TCJA on our rates will be
beneficial to our customers. Following the enactment of the TCJA and the
reduction of the federal income tax rate, revenues collected from our
customers in 2018 will be reduced in an amount that approximates the
savings in tax expense. This reduction in revenues is expected to
negatively impact our cash flows by approximately $26 million to $31
million during 2018.

We maintain the RCF for working capital and general corporate purposes
and financing of nuclear fuel through the Rio Grande Resources Trust
("RGRT"). The RGRT, the trust through which we finance our portion of
nuclear fuel for Palo Verde, is consolidated in our financial
statements. On January 9, 2017, we exercised the option to extend the
maturity of the RCF by one year to January 14, 2020 and to increase the
size of the facility by $50 million to $350 million. We still have the
option to extend the facility by one additional year to January 2021 and
to increase the RCF by up to $50 million (up to a total of $400 million)
upon the satisfaction of certain conditions, more fully set forth in the
agreement, including obtaining commitments from lenders or third party
financial institutions. In August 2017, RGRT's $50.0 million Series B
4.47% Senior Notes matured and were paid utilizing funds borrowed under
the RCF. The total amount borrowed for nuclear fuel by the RGRT,
excluding debt issuance costs, was $133.5 million at December 31, 2017,
of which $88.5 million had been borrowed under the RCF, and $45.0
million was borrowed through the issuance of senior notes. Borrowings by
the RGRT for nuclear fuel, excluding debt issuance costs, were $132.6
million as of December 31, 2016, of which $37.6 million had been
borrowed under the RCF and $95.0 million was borrowed through the
issuance of senior notes. Interest costs on borrowings to finance
nuclear fuel are accumulated by the RGRT and charged to us as fuel is
consumed and recovered through fuel recovery charges. In September 2017,
the $33.3 million 2012 Series A 1.875% Pollution Control Bonds which
were subject to mandatory tender for purchase were redeemed and retired
utilizing funds borrowed under the RCF. At December 31, 2017, $85.0
million was outstanding under the RCF for working capital and general
corporate purposes, which may include funding capital expenditures. At
December 31, 2016, $44.0 million was outstanding under the RCF for
working capital and general corporate purposes. Total aggregate
borrowings under the RCF at December 31, 2017 were $173.5 million with
an additional $176.4 million available to borrow.

We received approval from the NMPRC on October 7, 2015, to guarantee the
issuance of up to $65.0 million of long-term debt by the RGRT to finance
future purchases of nuclear fuel and to refinance existing nuclear fuel
debt obligations, which remains effective. We received additional
approval from the NMPRC on October 4, 2017 to amend and extend the 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 have
optional redemptions in 2019. The NMPRC approval to issue up to $350.0
million in long-term debt supersedes prior approval. We requested
similar approval from the FERC on September 1, 2017 and received
approval on October 31, 2017. The approval requested from the FERC also
includes requests to guarantee the issuance of up to $65.0 million of
long-term debt by the RGRT and to continue to utilize our existing RCF
with the ability to amend and extend the RCF at a future date. The
authorization approved by the FERC is effective from November 15, 2017
through November 14, 2019 and supersedes prior approvals.

2018 Earnings Guidance

The Company is providing earnings guidance for 2018 with a range of
$2.30 to $2.65 per basic share. The guidance assumes normal operations
and considers significant variables that may impact earnings, such as
weather, expenses, capital expenditures, nuclear decommissioning trust
gains/losses, and the impact of the TCJA. The mid-point of the guidance
range assumes 10 year average weather (cooling and heating degree days).

Conference Call

A conference call to discuss fourth quarter and year to date 2017
financial results is scheduled for 11:30 A.M. Eastern Time, on February
27, 2018. The dial-in number is 888-600-4863 with a conference ID number
of 9726561. The international dial-in number is 719-457-2644. The
conference leader will be Lisa Budtke, Director-Treasury Services and
Investor Relations.

Contacts

El Paso Electric Company
Media
Eddie Gutierrez,
915-543-5763
[email protected]
or
Investor
Relations
Lisa Budtke, 915-543-5947
[email protected]

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