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NEWS RELEASE
Contact:
Media: Teresa Souza, 915-543-5823
Analysts: Rachelle Williams, 915-543-2257
Date: November 1, 2007
Overview
- For the third quarter 2007, EE reported net income of $36.1 million, or $0.79 basic and diluted earnings per share. In the third quarter of 2006, EE had net income of $27.1 million, or $0.57 and $0.56 basic and diluted earnings per share, respectively.
- For the nine months ended September 30, 2007, EE reported net income of $60.8 million, or $1.33 and $1.32 basic and diluted earnings per share, respectively. Net income for the nine months ended September 30, 2006 was $51.6 million, or $1.07 and $1.06 basic and diluted earnings per share, respectively.
“The $9.0 million increase in earnings in the third quarter of 2007 relative to the third quarter of 2006 was largely driven by weather, as our base retail revenues in the quarter rebounded from last year’s levels, which were significantly suppressed by record setting rains and inclement weather,” said Ershel Redd, President and Chief Executive Officer. “Earnings were also positively impacted in the quarter by capitalization of financing costs associated with our significant infrastructure investment program, by lower administrative and general expenses and by repricing a portion of sales of power from Palo Verde Unit 3, a repricing that will afford us an opportunity to recover our cost of providing power from this unit. We continue to be challenged, however, by the increased costs of operating the Palo Verde nuclear power station.”
Earnings Summary
The table and explanations below present the major factors affecting 2007 net income relative to 2006.
Third Quarter
Earnings for the quarter ended September 30, 2007 when compared to the same period last year were positively affected by:
- A 6.6% increase in retail base revenues primarily due to a 6.1% increase in retail kWh sales. The kWh sales increase reflects a return to normal weather in 2007 after an unusually wet and mild summer in 2006. KWh sales were also favorably impacted by a 2.4% increase in the average number of retail customers.
- Decreased administrative and general expenses due to an increase in capitalized employee benefits, decreased workers compensation insurance expense, and a sales tax refund in 2007.
- An increase in the price of energy for Palo Verde Unit 3 power sold to our retail customers in New Mexico. The New Mexico portion of Palo Verde Unit 3 is deregulated and the output sold to New Mexico retail customers is recovered as a purchased power cost through the New Mexico fuel adjustment clause.
- Increased capitalized interest and AFUDC (allowance for funds used during construction) in 2007 due to the re-application of SFAS No. 71 to our Texas jurisdiction beginning December 31, 2006 and increased construction work in progress and nuclear fuel subject to AFUDC and capitalized interest in 2007.
- Increased investment and interest income due to gains on the sale of securities held in the decommissioning trusts and interest earned on a Texas sales tax refund in 2007 with no comparable activity in 2006.
Earnings for the quarter ended September 30, 2007 when compared to the same period last year were negatively affected by:
- Increased Palo Verde non-fuel O&M expenses in 2007 due to increased operating costs and Palo Verde Units 1 and 3 maintenance costs.
- Decreased off-system sales margins retained in 2007 due primarily to low market prices for power.
Year to Date
Earnings for the nine months ended September 30, 2007 when compared to the same period last year were positively affected by:
- A 2.9% increase in retail base revenues in 2007 primarily due to a 2.8% increase in retail kWh sales. KWh sales growth was primarily the result of a 2.5% increase in the average number of retail customers, as the weather-related revenue effects of each of the quarters tended to offset over the nine month period.
- Decreased administrative and general expenses due to an increase in capitalized employee benefits, decreased workers compensation insurance expense, and a sales tax refund in 2007.
- An increase in the price of energy for Palo Verde Unit 3 power sold to our retail customers in New Mexico. The New Mexico portion of Palo Verde Unit 3 is deregulated and the output sold to New Mexico retail customers is recovered as a purchased power cost through the New Mexico fuel adjustment clause.
- Increased capitalized interest and AFUDC (allowance for funds used during construction) in 2007 due to the re-application of SFAS No. 71 to our Texas jurisdiction beginning December 31, 2006 and increased construction work in progress and nuclear fuel subject to AFUDC and capitalized interest in 2007.
- Increased investment and interest income due to gains on the sale of securities held in the decommissioning trusts and interest income from the decommissioning trusts, and interest earned on a Texas sales tax refund in 2007 with no comparable activity in 2006.
- Decreased O&M costs at our gas-fired generating plants due to a reduction in 2007 of unplanned and planned maintenance compared to 2006.
- Increased off-system sales margins retained in 2007 due to increased MWh sales from greater availability from Palo Verde power in the first six months of 2007 partially offset by lower margins per MWh.
Earnings for the nine months ended September 30, 2007 when compared to the same period last year were negatively affected by:
- Increased Palo Verde non-fuel O&M expenses in 2007 due to increased operations costs at all three units.
- Decreased transmission wheeling revenues in 2007.
- A reduction in income tax expense in 2006 to recognize the change in tax rates resulting from changes in the Texas franchise (income) tax law in May 2006 with no comparable change in tax law in 2007. This adjustment was a non-cash change in the second quarter of 2006 affecting deferred income tax liabilities.
- A fuel revenue adjustment recorded in 2006 based on a final order of the New Mexico Public Regulation Commission finding that the Company could recover purchased power capacity cost through its New Mexico fuel adjustment clause with no comparable adjustment in 2007.
Key Earnings Drivers
Our earnings are largely influenced by base revenues from retail electric customers, operations at Palo Verde, and off-systems sales margins.
Retail Non-fuel Base Revenues
Retail non-fuel base revenues increased by $8.6 million, pre-tax, or 6.6% in the third quarter of 2007 compared to the same period in 2006 primarily due to increased kWh sales to residential and small commercial and industrial customers. Residential non-fuel base revenues increased by $5.6 million, pre-tax, or 10.2%, and small commercial and industrial revenues increased $3.2 million, pretax, or 7.1% in the third quarter of 2007 compared to the same period in 2006. KWh sales to residential and small commercial and industrial customers increased 11.1% and 5.6%, respectively, due to a return to normal summer weather in 2007 after an unusually mild and wet summer in 2006. In addition, the average number of residential customers increased 2.1% and the average number of small commercial and industrial customers increased 6.2%. Cooling degree days in the third quarter of 2007 were 4% higher than the 10-year average and 23% higher than the third quarter of 2006. Non-fuel base revenues from sales to public authorities increased $0.5 million or 2.8% and non-fuel base revenues from large commercial and industrial customers decreased $0.8 million or 7.3%.
Retail non-fuel base revenues for the nine months ended September 30, 2007 increased $9.9 million, pre-tax, or 2.9% largely due to a 2.5% increase in the average number of retail customers served. KWh sales to residential customers increased 5.6% in the nine-month period compared to the same period last year largely as a result of a 2.3% increase in the average number of residential customers served. Colder winter weather in the first quarter of 2007 also contributed to the increase in sales. Heating degree days increased 32% while cooling degree days remained relatively unchanged for the nine-month period in 2007 compared to the same period last year. Small commercial and industrial non-fuel base revenues increased $2.9 million or 2.4% in the nine-month period ended September 30, 2007 compared to the same period in 2006 primarily due to a 1.5% increase in kWh sales. Other public authorities’ non-fuel base revenues increased $0.8 million or 1.6% while large commercial and industrial non-fuel base revenues decreased $0.6 million or 2.1%.
Palo Verde Operations
We own approximately 622 MW (undivided interest) of generating capacity in the three generating units at the Palo Verde nuclear power station. The operation of Palo Verde not only affects our ability to make off-system sales, but also impacts fuel costs to native load customers and represents a significant portion of our non-fuel operating expenses. Palo Verde operated at a capacity factor of 85.7% in the nine-month period ended September 30, 2007 compared to a capacity factor of 69.0% in the nine-month period ended September 30, 2006. Generation at Palo Verde increased 24.3% in the nine months ended September 30, 2007 compared to the same period in 2006 primarily due to increased output from Palo Verde Unit 1. Palo Verde Unit 1 operated at a substantially reduced capacity factor during the first quarter of 2006 and did not operate during the second quarter of 2006 while repairs and modifications were made to one of its shutdown cooling lines. Palo Verde Unit 1 reached full capacity on July 16, 2006.
Palo Verde operation and maintenance expenses increased $4.7 million in the third quarter of 2007 compared to the third quarter of 2006 and $5.8 million for the nine months ended September 30, 2007 compared to the same period last year reflecting increased operating costs primarily in response to an enhanced inspection regimen imposed by the Nuclear Regulatory Commission (NRC).
Off-System Sales
We continue to make off-system sales in the wholesale power markets when competitively priced excess power is available from our generating plants and purchased power contracts. The table below shows MWh of off-system sales and the pre-tax margins realized and retained by us from sales for the quarter and nine month periods ended September 30, 2007 and 2006:
For the quarter ended September 30, 2007, retained margins from off-system sales decreased approximately $1.5 million, pre-tax, over the corresponding period in 2006 due to lower market prices for power. As a result, the average retained margin per MWh decreased $6.18. Also, in July 2007, we began sharing 25% of New Mexico jurisdiction off-system sales margins with customers pursuant to a rate settlement (the same percentage margin sharing treatment as Texas).
For the nine months ended September 30, 2007, our retained margins increased approximately $3.0 million, pre-tax, over the corresponding period in 2006 reflecting an increase in off-system kWh sales of 62.1% partially offset by a decrease in the average retained margin per MWh of $2.36. We had increased energy available for sale in the first nine months of 2007 compared to the same period in 2006 primarily due to the increased energy generated at Palo Verde in the first six months of 2007 compared to the same period in 2006. The table below shows on a per MWh basis, pretax revenues, costs and margins from off-system sales for the first three quarters of 2007 and 2006.
Capital and Liquidity
At September 30, 2007, common stock equity comprised 47.9% of our permanent capitalization (common stock, long-term debt and the current portion of long-term debt and financing obligations).
Cash flows from operations for the nine months ended September 30, 2007 decreased to $147.2 million from $175.3 million in the corresponding period in 2006 primarily due to reduced collections of deferred fuel revenues in 2007. In Texas, fuel costs are recovered through a fixed fuel factor which may be adjusted twice a year. We record deferred fuel revenues for the under-recovery of fuel costs until they can be recovered from Texas customers. In September 2007, we completed the recovery of $53.6 million of fuel under-recoveries through a fuel surcharge which began in October 2005. We completed the recovery in January 2007 of $34 million of fuel under-recoveries, including interest through the surcharge period, through a fuel surcharge which began in February 2006. In the nine-month periods ended September 30, 2007 and September 30, 2006, we collected $22.9 million and $43.1 million of deferred fuel revenues in Texas through fuel surcharges, which increased our cash flow in those periods. In the nine-month periods ended September 30, 2007 and September 30, 2006, we also under-collected current fuel costs by $12.9 million and $1.5 million, respectively. At September 30, 2007, we had an under-recovered fuel balance of $22.7 million. We expect to seek recovery of this balance by filing a request to institute a fuel surcharge in January 2008, the next semi-annual period under Texas regulation when we can file for a fuel surcharge and to change our fixed fuel recovery factor.
During the first nine months of 2007, our primary capital requirements were for construction of electric utility plant, nuclear fuel and the repurchase of common stock. Capital requirements for new electric plant were $104.0 million for the nine month period ended September 30, 2007 compared to $65.5 for the nine month period ended September 30, 2006. We financed capital requirements for electric plant and common stock repurchases with cash flows from operations. At September 30, 2007, we had a balance of $34.9 million in cash and temporary cash investments.
Our capital requirements for nuclear fuel increased substantially in 2007 as a result of increases in prices for uranium concentrates and to increase our inventory of nuclear fuel feedstock. We finance our nuclear fuel inventory through a trust that borrows under our $200 million credit facility to acquire and process the nuclear fuel. In 2007, borrowings under the credit facility for nuclear fuel increased $40.5 million to $86.7 million as of September 30, 2007 compared to an increase of $2.5 million in 2006 to $44.4 million as of September 30, 2006.
During the first nine months of 2007, we repurchased 1,344,338 shares of common stock at an aggregate cost of $31.4 million including the repurchase of 755,238 shares of common stock during the third quarter of 2007 at an aggregate cost of $17.4 million. As of September 30, 2007, no shares remain available for repurchase under the currently authorized stock repurchase program.
2007 Earnings Guidance
We have revised our earnings guidance for 2007 to a range of $1.40 to $1.60 per basic share from previous guidance of $1.25 to $1.65 per basic share. We are providing earnings guidance for 2008 of a range of $1.60 to $1.95 per basic share.
Conference Call
A conference call to discuss third quarter 2007 earnings is scheduled for 4 p.m. Eastern Time, November 1, 2007. The dial-in number is 877-950-3595 with a passcode of 2007. The conference leader will be Scott Wilson, Executive Vice President, Chief Financial and Chief Administrative Officer of EE. A replay will run through November 15, 2007. The dial-in number is 866-380-8120 and a passcode is not required for the replay. The conference call and presentation slides will be webcast live on EE’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; (ii) determinations by regulators that may adversely affect EE’s ability to recover previously incurred fuel costs in rates; (iii) fluctuations in off-system sales margins due to uncertainty in the economy power market and the availability of generating units; (iv) unanticipated increased costs associated with scheduled and unscheduled outages; (v) the cost of replacing steam generators for Palo Verde Unit 3 and other costs at Palo Verde, including additional costs relating to an enhanced NRC oversight and inspection regimen; (vi) the costs of legal defense and possible judgments which may accrue as the result of ongoing litigation or any regulatory proceeding; (vii) deregulation of the electric utility industry; (viii) reduced wholesale margins; (ix) possible increased costs of compliance with environmental or other laws, regulations and policies; (x) possible income tax and interest payments as a result of audit adjustments proposed by the IRS; (xi) possible warranty obligations attributable to MiraSol Energy Services, a subsidiary of EE; and (xii) 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, 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.
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