El Paso Electric Announces Second Quarter Financial Results

El Paso Electric Company (NYSE:EE):

Overview

• For the second quarter of 2014, El Paso Electric Company ("EE" or the "Company") reported net income of $30.1 million, or $0.75 basic and diluted earnings per share. In the second quarter of 2013, EE reported net income of $29.2 million, or $0.73 and $0.72 basic and diluted earnings per share, respectively.
• For the six months ended June 30, 2014, EE reported net income of $34.7 million, or $0.86 basic and diluted earnings per share. Net income for the six months ended June 30, 2013 was $36.8 million, or $0.92 basic and diluted earnings per share.

“El Paso Electric achieved several significant milestones in the second quarter of 2014. First, we began construction of our new Montana Power Station Units 1 and 2; second, we reached a new native system peak of 1,766 MW on June 4, 2014, and continue to see growth in the number of customers we serve; and, finally, we successfully settled our 2013 Texas fuel reconciliation case. This settlement covers $545.3 million of fuel and purchased power expenses incurred during the 45-month period of July 1, 2009 through March 31, 2013,” said Tom Shockley, Chief Executive Officer. “Our earnings for the second quarter of 2014 were slightly ahead of the corresponding quarter of 2013 and include Palo Verde performance rewards realized after settling the Texas fuel reconciliation proceeding which added $0.04 earnings per share in our most recent quarter.”

Earnings Summary

The table and explanations below present the major factors affecting 2014 net income relative to 2013 net income:

Second Quarter 2014

Income for the quarter ended June 30, 2014, when compared to the same period last year, was positively affected by:

• Recognition of Palo Verde performance rewards associated with the 2009 to 2012 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. 41852.
• Increased allowance for funds used during construction ("AFUDC") due to higher balances of construction work in progress subject to AFUDC.
• Increased miscellaneous income and deductions, primarily due to gains recognized on the sale of assets in 2014 with no comparable activity in the same period of 2013, and decreased donations.

Income for the quarter ended June 30, 2014, when compared to the same period last year, was negatively affected by:

• Increased taxes other than income taxes primarily due to higher property taxes.
• Increased depreciation and amortization due to increased depreciable plant balances including Rio Grande Unit 9, which began commercial operation on May 13, 2013.
• Decreased retail non-fuel base revenues primarily due to a $0.8 million reduction in non-fuel base revenues from sales to our residential customers reflecting a 1.5% decrease in kWh sales due to milder weather in the second quarter of 2014 compared to the same period last year.

Year to Date

Income for the six months ended June 30, 2014, when compared to the same period last year, was positively affected by:

• Increased investment and interest income primarily due to net realized gains on equity investments in our Palo Verde decommissioning trust funds compared to the same period last year.
• Increased miscellaneous income and deductions, primarily due to the gains recognized on the sale of assets in 2014 with no comparable activity in the same period last year, and decreased donations.
• Increased AFUDC due to higher balances of construction work in progress subject to AFUDC.
• Recognition of Palo Verde performance rewards associated with the 2009 to 2012 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. 41852.

Income for the six months ended June 30, 2014, when compared to the same period last year, was negatively affected by:

• Decreased retail non-fuel base revenues primarily due to a $4.8 million reduction in non-fuel base revenues from sales to our residential customers reflecting a 5.2% decrease in kWh sales due to milder weather in 2014, particularly in the first quarter of 2014, when compared to the same period last year.
• Increased taxes other than income taxes primarily due to higher property taxes including a one-time adjustment to the 2013 Arizona property tax rate recorded during the first quarter of 2014.
• Increased depreciation and amortization due to increased depreciable plant balances including Rio Grande Unit 9, which began commercial operation on May 13, 2013.

Retail Non-fuel Base Revenues

Retail non-fuel base revenues decreased $0.9 million, pre-tax, or 0.6% in the second quarter of 2014 compared to the same period in 2013. This decrease reflects milder weather in the second quarter of 2014, which impacted sales to residential, small commercial, and to a lesser extent public authority customers. Cooling degree days decreased 3.8% for the second quarter of 2014 compared to the same quarter last year but remained higher than the 10-year average by 4.2%. KWh sales to residential customers decreased by 1.5%, despite a 1.3% increase in the average number of residential customers served. KWh sales to small commercial and industrial customers in the second quarter of 2014 decreased 1.7% compared to the same quarter in 2013, despite a 1.9% increase in the average number of customers served. Retail non-fuel base revenues from sales to public authorities increased slightly, primarily due to demand charges, despite a 0.5% decrease in kWh sales to public authorities compared to the same quarter in 2013. Retail non-fuel base revenues and kWh sales to large commercial and industrial customers were relatively unchanged for the quarter. Non-fuel base revenues and kWh sales are provided by customer class on page 10 of this release.

For the six months ended June 30, 2014, retail non-fuel base revenues decreased $5.7 million, pre-tax, or 2.2% compared to the same period in 2013. This decrease reflects milder weather in the first six months of 2014, which impacted sales to residential, small commercial, and to a lesser extent public authority customers. Heating degree days decreased 26.6% for the six months of 2014 compared to the same period last year and were 17.0% below the 10-year average. Cooling degree days decreased 4.4% compared to the same period last year but remained higher than the 10-year average by 4.0%. KWh sales to residential customers decreased by 5.2% despite a 1.3% increase in the average number of residential customers served. KWh sales to small commercial and industrial customers decreased 1.6% compared to the same period in 2013, despite a 2.0% increase in the average number of customers served. KWh sales to large commercial and industrial customers decreased 3.4% and non-fuel base revenues decreased 1.5%. While kWh sales to public authorities in the six months of 2014 decreased approximately 2.3% compared to the same period in 2013, non-fuel base revenues increased slightly due to demand charges. Non-fuel base revenues and kWh sales are provided by customer class on page 12 of this release.

Texas Fuel Reconciliation Proceeding

On July 11, 2014, the PUCT approved a settlement in the Texas fuel reconciliation proceeding designated as PUCT Docket No. 41852. The settlement provides for the reconciliation of fuel and purchased power costs incurred from July 1, 2009 through March 31, 2013. The quarter ended June 30, 2014 financial results includes a $2.1 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 2009 to 2012 performance periods net of disallowed fuel and purchased power costs as determined by the PUCT.

Quarterly Cash Dividend

On May 29, 2014, the Board of Directors approved an increase to the quarterly cash dividend to $0.28 per share of common stock from our previous quarterly rate of $0.265 per share. This represents an increase in the annualized cash dividend from $1.06 to $1.12 per share. The dividend increase commenced with the June 30, 2014 payments. On July 24, 2014, the Board of Directors declared a quarterly cash dividend of $0.28 per share payable on September 30, 2014 to shareholders of record on September 15, 2014.

Capital and Liquidity

We continue to maintain a strong capital structure to ensure access to capital markets at reasonable rates. At June 30, 2014, common stock equity represented 47.0% of our capitalization (common stock equity, long-term debt, and short-term borrowings under the revolving credit facility (the "RCF")). At June 30, 2014, we had a balance of $12.7 million in cash and cash equivalents. We expect to issue long-term debt in the capital markets in 2014 or early 2015 to repay short-term borrowings and finance capital requirements. 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 six months ended June 30, 2014 were $57.0 million compared to $51.4 million in the corresponding period in 2013. The primary factors affecting the increased cash flow were the funding of $17.9 million for employee pension and other post-retirement benefit plans in the first six months of 2013 compared to $6.9 million in the first six months of 2014, and a decrease in accounts receivable due to the timing of customer payments. These increases in cash flows from operations were partially offset by an increase in the 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 six months ended June 30, 2014, the Company had a fuel under-recovery of $13.4 million compared to an under-recovery of fuel costs of $8.9 million during the six months ended June 30, 2013. At June 30, 2014, we had a net fuel under-recovery balance of $19.6 million, including an under-recovery balance of $17.2 million in Texas, $2.3 million in New Mexico, and $0.1 million for our FERC customer. On April 15, 2014, we filed a request to increase our Texas fixed fuel factor by 6.9% to reflect increases in prices for natural gas. This increase received final approval on May 28, 2014 and was effective with May 2014 billings.

During the six months ended June 30, 2014, our primary capital requirements were for the construction and purchase of electric utility plant, payment of common stock dividends, and purchases of nuclear fuel. Capital requirements for new electric plant were $106.0 million for the six months ended June 30, 2014 and $110.3 million for the six months ended June 30, 2013. Capital expenditures for 2014 are expected to be $316 million as we construct the Montana Power Station and related transmission facilities. Capital requirements for purchases of nuclear fuel were $17.7 million for the six months ended June 30, 2014 and $16.9 million for the six months ended June 30, 2013.

On June 30, 2014, we paid a quarterly cash dividend of $0.28 per share, or $11.3 million to shareholders of record on June 13, 2014. We paid a total of $22.0 million in cash dividends during the six months ended June 30, 2014. At the current dividend rate, we expect to pay cash dividends of approximately $44.6 million during 2014.

No shares of common stock were repurchased during the six months ended June 30, 2014. As of June 30, 2014, a total of 393,816 shares remain available for repurchase under the currently authorized stock repurchase program. The Company may repurchase shares in the open market from time to time.

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 the Company's financial statements. The RCF has a term ending January 14, 2019. The aggregate unsecured borrowing available under the RCF is $300 million. We may increase the RCF by up to $100 million (up to a total of $400 million) during the term of the agreement, upon the satisfaction of certain conditions, more fully set forth in the agreement, including obtaining commitments from lenders or third party financial institutions. The amounts we borrow under the RCF may be used for working capital and general corporate purposes. The total amount borrowed for nuclear fuel by the RGRT was $126.8 million at June 30, 2014 of which $16.8 million had been borrowed under the RCF and $110 million was borrowed through senior notes. Borrowings by the RGRT for nuclear fuel were $130.3 million as of June 30, 2013, of which $20.3 million had been borrowed under the RCF and $110 million was borrowed through 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. At June 30, 2014, $81.0 million was outstanding under the RCF for working capital and general corporate purposes and we expect to refinance the working capital and general corporate borrowings on the RCF with long-term debt in late 2014 or early 2015. At June 30, 2013, $6.0 million was outstanding under the RCF for working capital or general corporate purposes.

2014 Earnings Guidance

We are narrowing our earnings guidance for 2014 to $2.15 to $2.40 per basic share from the previous range of $2.10 to $2.50.

Conference Call

A conference call to discuss second quarter 2014 financial results is scheduled for 10:30 A.M. Eastern Daylight Time, on August 6, 2014. The dial-in number is 888-401-4669 with a conference ID number of 6099953. The international dial-in number is 719-785-1753. The conference leader will be John Boomer, Vice President, Treasurer. A replay will run through August 20, 2014 with a dial-in number of 888-203-1112 and a conference ID number of 6099953. The replay international dial-in number is 719-457-0820. The conference call and presentation slides will be webcast live on the Company's website found at http://www.epelectric.com. A replay of the webcast will be available shortly after the call.

Safe Harbor

This news release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This information may involve risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: (i) increased prices for fuel and purchased power and the possibility that regulators may not permit EE to pass through all such increased costs to customers or to recover previously incurred fuel costs in rates; (ii) recovery of capital investments and operating costs through rates in Texas and New Mexico; (iii) uncertainties and instability in the general economy and the resulting impact on EE's sales and profitability; (iv) changes in customers' demand for electricity as a result of energy efficiency initiatives and emerging competing services and technologies; (v) unanticipated increased costs associated with scheduled and unscheduled outages of generating plant; (vi) the size of our construction program and our ability to complete construction on budget; (vii) potential delays in our construction schedule due to legal challenges or other reasons; (viii) costs at Palo Verde; (ix) deregulation and competition in the electric utility industry; (x) possible increased costs of compliance with environmental or other laws, regulations and policies; (xi) possible income tax and interest payments as a result of audit adjustments proposed by the IRS or state taxing authorities; (xii) uncertainties and instability in the financial markets and the resulting impact on EE's ability to access the capital and credit markets; and (xiii) other factors detailed by EE in its public filings with the Securities and Exchange Commission. EE's filings are available from the Securities and Exchange Commission or may be obtained through EE's website, http://www.epelectric.com. Any such forward-looking statement is qualified by reference to these risks and factors. EE cautions that these risks and factors are not exclusive. EE does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of EE except as required by law.