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 March 31, ~~2019~~2020



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 Street
El Paso,	Texas	79901
(Address of principal executive offices)		(Zip Code)

~~(915)~~ (915) 543-5711

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	EE	New York Stock Exchange

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 oYes☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ~~YES~~ x NO oYes☒ No ☐

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~~Accelerated Filer	x☒	Accelerated ~~filer~~Filer	o☐

Non-accelerated ~~filer~~Filer	o☐	Smaller ~~reporting company~~Reporting Company	o☐

		Emerging ~~growth company~~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



~~Securities registered pursuant to Section 12(b) of the Act:~~
~~Title of each class~~	~~Trading symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, No Par Value~~	EE	~~New York Stock Exchange~~

Yes ☐ No ☒

As of April 30, ~~2019,~~2020, there were ~~40,738,183~~40,787,627 shares of the Company’s common stock outstanding.

DEFINITIONS

The following abbreviations, acronyms or defined terms used in this report are defined below:



Abbreviations, Acronyms or Defined Terms		Terms

A&G		Administrative and general
~~ABFUDC~~ADIT		~~Allowance for Borrowed Funds Used During Construction~~Accumulated Deferred Income Taxes
AEFUDC		Allowance for Equity Funds Used During Construction
AFUDC		Allowance for Funds Used During Construction
ALJ		Administrative Law Judge
Amended REA		Amendment to the REA by the New Mexico Energy Transition Act, effective June 14, 2019
ANPP Participation Agreement		Arizona Nuclear Power Project Participation Agreement dated August 23, 1973, as amended
~~AOCI~~		~~Accumulated Other Comprehensive Income~~
APS		Arizona Public Service Company
ASU		Accounting Standards Update
CCN		Certificate of Convenience and Necessity
Company		El Paso Electric Company
COVID-19		Coronavirus Disease 2019, the disease caused by the 2019 novel coronavirus (SARS-CoV-2)
DCRF		Distribution Cost Recovery Factor
DOE		U.S. Department of Energy
EECRF		Energy Efficiency Cost Recovery Factor
El Paso		City of El Paso, Texas
EUERF		Efficient Use of Energy Recovery Factor
Exchange Act		The Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
FCC		Federal Communications Commission
FERC		Federal Energy Regulatory Commission
~~Four Corners~~		~~Four Corners Generating Station~~
FPPCAC		New Mexico Fuel and Purchased Power Cost Adjustment Clause
FTC		Federal Trade Commission
GAAP		U.S. Generally Accepted Accounting Principles
~~GHG~~Gorski Action		~~Greenhouse Gas~~Gorski v. El Paso Electric Company., et al., Case No. 1:19-cv-07211, in the U.S. District Court for the Southern District of New York
kWHearing Examiner		~~Kilowatt(s)~~The Hearing Examiner of the NMPRC
HSR Act		Hart-Scott-Rodino Antitrust Improvements Act of 1976
IIF		Infrastructure Investments Fund, an investment vehicle advised by J.P. Morgan Investment Management Inc.
kWh		Kilowatt-hour(s)
~~Las Cruces~~LTPPA		~~City of Las Cruces, New Mexico~~Long-Term Purchased Power Agreement
~~MPS~~Merger		Merger of Merger Sub with and into the Company with the Company as the surviving corporation pursuant to the Merger Agreement
Merger Agreement		Agreement and Plan of Merger, by and among the Company, Parent and Merger Sub, dated June 1, 2019
Merger Consideration		The ~~Company's Montana Power Station~~right to receive $68.25 in cash per share of common stock, without interest, on and subject to the terms and conditions set forth in the Merger Agreement
Merger Sub		Sun Merger Sub Inc.
MW		Megawatt(s)
MWh		Megawatt-hour(s)
NAV		Net Asset Value



	(i)



Abbreviations, Acronyms or Defined Terms		Terms

NDT		The Company's Palo Verde nuclear decommissioning trust funds
Newman		The Company's Newman Power Station
NMPRC		New Mexico Public Regulation Commission
NMPUA		New Mexico Public Utility Act
NMSU		New Mexico State University
NOPR		Notice of Proposed Rulemaking
NRC		U.S. Nuclear Regulatory Commission
O&M		Operations and maintenance
OATT		Open Access Transmission Tariff
Parent		Sun Jupiter Holdings LLC
Palo Verde		Palo Verde Generating Station
Palo Verde Participation		Those utilities that share in power and energy entitlements, and bear certain allocated costs, with respect to Palo Verde pursuant to the ANPP Participation Agreement
PCBs		Pollution Control ~~Refunding Revenue~~ Bonds
PUCT		Public Utility Commission of Texas
PURA		Texas Public Utility Regulatory Act
RCF		The Company's Revolving Credit Facility
REA		New Mexico Renewable Energy Act
RGRT		Rio Grande Resources Trust II
Rio Grande		The Company's Rio Grande Power Station
Rosenblatt Action		Rosenblatt v. El Paso Electric Company, et al., Case No. 1:19-cv-01367-UNA, in the U.S. District Court for the District of Delaware
ROU		Right-of-use
RPS		Renewable Portfolio Standard
Rule 551		NMPRC Rule 17.9.551 of the New Mexico Administrative Code
SEC		U.S. Securities and Exchange Commission
Show Cause Proceeding		FERC proceeding in which a company must revise its transmission rates for the TCJA effect or show cause as to why it should not be required to do so
SPS		Southwestern Public Service Company
SPS Appeal No. 1		Southwestern Public Service Co. v. NMPRC, No. S-1-SC-37248, in the New Mexico Supreme Court
SPS Appeal No. 2		Southwestern Public Service Co. v. NMPRC, No. S-1-SC-37308, in the New Mexico Supreme Court
Stein Action		Stein v. El Paso Electric Company., et al., Case No. 1:19-cv-06703, in the U.S. District Court for the Southern District of New York
TCJA		The federal legislation commonly referred to as the Tax Cuts and Jobs Act of 2017
TCRF		Transmission Cost Recover Factor
Texas Fuel Rule		Fuel cost recovery rule of the PUCT
U.S.		United States
2017 PUCT Final Order		PUCT Final Order in Docket No. 46831
~~2018~~2019 DCRF rate filing		DCRF rate filing in PUCT Docket No. 49395
2019 Form 10-K		Annual Report of El Paso Electric Company on Form 10-K for the fiscal year ended December 31, ~~2018~~2019
2019 TCRF rate filing		TCRF rate filing in PUCT Docket No. 49148



	~~(i)~~(ii)

EL PASO ELECTRIC COMPANY

INDEX TO FORM 10-Q



		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets - March 31, ~~2019~~2020 and December 31, ~~2018~~2019	1
	Statements of Operations – Three Months and Twelve Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	3
	Statements of Comprehensive Operations – Three Months and Twelve Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	4
��	Statements of Changes in Common Stock Equity - Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	5
	Statements of Cash Flows – Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	6
	Notes to Financial Statements	7
	Report of Independent Registered Public Accounting Firm	3032
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3133
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4851
Item 4.	Controls and Procedures	4851
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	4952
Item 1A.	Risk Factors	4952
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4953
Item 5.	Other Information	4953
Item 6.	Exhibits	5053



	~~(ii)~~(iii)

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

EL PASO ELECTRIC COMPANY

BALANCE SHEETS


	March 31, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(Unaudited)						(Unaudited)

ASSETS (In thousands)
Utility plant:
Electric plant in service	$	4,227,687		$	4,181,409		$	4,447,169		$	4,404,150
Less accumulated depreciation and amortization	(1,409,573		)	(1,391,266		)	(1,486,274		)	(1,461,385		)
Net plant in service	2,818,114			2,790,143			2,960,895			2,942,765
Construction work in progress	176,891			169,327			164,528			157,851
Nuclear fuel; includes fuel in process of $73,105 and $62,833, respectively	208,552			198,280
Nuclear fuel; includes fuel in process of $57,845 and $61,709, respectively							211,336			198,075
Less accumulated amortization	(82,699		)	(72,703		)	(81,560		)	(71,588		)
Net nuclear fuel	125,853			125,577			129,776			126,487
Net utility plant	3,120,858			3,085,047			3,255,199			3,227,103
Current assets:
Cash and cash equivalents	8,505			12,900			57,379			10,818
Restricted cash	38,445			—
Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,514 and $2,070, respectively	70,259			77,855
Accounts receivable, principally trade, net of allowance for doubtful accounts of $1,778 and $1,900, respectively							66,307			79,814
Inventories, at cost	57,542			55,432			60,429			60,872
Regulatory assets	7,272			6,972			9,290			9,939
Prepayments and other	25,531			20,375			15,539			11,203
Total current assets	207,554			173,534			208,944			172,646
Deferred charges and other assets:
Decommissioning trust funds	298,338			276,905			294,501			325,998
Regulatory assets	74,107			74,848			69,640			70,805
Other	17,713			18,168			17,551			16,648
Total deferred charges and other assets	390,158			369,921			381,692			413,451
Total assets	$	3,718,570		$	3,628,502		$	3,845,835		$	3,813,200

See accompanying notes to financial statements.

EL PASO ELECTRIC COMPANY

BALANCE SHEETS (Continued)


	March 31, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
CAPITALIZATION AND LIABILITIES (In thousands except for share data)
Capitalization:
Common stock, stated value $1 per share, 100,000,000 shares authorized, 65,678,261 and 65,707,156 shares issued, and 150,427 and 121,532 restricted shares, respectively	$	65,829		$	65,829
Common stock, stated value $1 per share, 100,000,000 shares authorized, 64,312,516 and 64,332,884 shares issued, and 116,172 and 95,804 restricted shares, respectively							$	64,429		$	64,429
Capital in excess of stated value	328,228			328,480			322,890			323,367
Retained earnings	1,218,902			1,227,471			1,221,513			1,272,418
Accumulated other comprehensive loss, net of tax	(37,127		)	(38,784		)	(48,977		)	(48,952		)
	1,575,832			1,582,996			1,559,855			1,611,262
Treasury stock, 25,090,505 and 25,147,567 shares, respectively, at cost	(417,943		)	(418,893		)
Treasury stock, 23,656,061 and 23,696,262 shares, respectively, at cost							(394,044		)	(394,715		)
Common stock equity	1,157,889			1,164,103			1,165,811			1,216,547
Long-term debt, net of current portion	1,286,111			1,285,980			1,341,131			1,340,981
Total capitalization	2,444,000			2,450,083			2,506,942			2,557,528
Current liabilities:
Current maturities of long-term debt	36,550			99,239			44,979			44,969
Short-term borrowings under the revolving credit facility	202,951			49,207			240,781			113,801
Accounts payable, principally trade	46,911			58,150			43,386			65,745
Taxes accrued	28,147			37,139			27,205			39,315
Interest accrued	19,449			16,478			18,920			14,196
Regulatory liabilities	26,484			14,686			12,908			19,961
Other	41,000			38,356			41,565			38,408
Total current liabilities	401,492			313,255			429,744			336,395
Deferred credits and other liabilities:
Accumulated deferred income taxes	326,849			325,133			337,366			348,398
Accrued pension liability	85,012			87,259			94,378			96,745
Accrued post-retirement benefit liability	25,134			24,575			23,599			23,081
Asset retirement obligation	103,349			101,108
Asset retirement obligations							112,553			110,105
Regulatory liabilities	298,615			298,570			298,705			298,466
Other	34,119			28,519			42,548			42,482
Total deferred credits and other liabilities	873,078			865,164			909,149			919,277
Commitments and contingencies
Total capitalization and liabilities	$	3,718,570		$	3,628,502		$	3,845,835		$	3,813,200

See accompanying notes to financial statements.

EL PASO ELECTRIC COMPANY

STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands except for share data)



	Three Months Ended						Twelve Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Operating revenues	$	158,563		$	174,363		$	846,194		$	902,253
Operating expenses:
Fuel and purchased power	33,624			48,326			161,219			225,247
Operations and maintenance	80,704			80,413			332,848			335,136
Depreciation and amortization	26,466			25,126			103,412			97,694
Taxes other than income taxes	16,071			16,189			73,233			71,682
	156,865			170,054			670,712			729,759
Operating income	1,698			4,309			175,482			172,494
Other income (deductions):
Allowance for equity funds used during construction	586			1,001			2,130			3,534
Investment and interest income (losses), net	(25,599		)	23,707			20,321			36,929
Miscellaneous non-operating income	2,945			3,048			15,166			12,735
Strategic transaction costs	(1,295		)	—			(13,405		)	—
Miscellaneous non-operating deductions	(3,149		)	(2,357		)	(10,738		)	(11,594		)
	(26,512		)	25,399			13,474			41,604
Interest charges (credits):
Interest on long-term debt and revolving credit facility	18,743			18,989			74,542			76,425
Other interest	4,547			5,233			20,680			18,469
Capitalized interest	(1,378		)	(1,532		)	(5,575		)	(5,801		)
Allowance for borrowed funds used during construction	(885		)	(972		)	(3,928		)	(3,686		)
	21,027			21,718			85,719			85,407
Income (loss) before income taxes	(45,841		)	7,990			103,237			128,691
Income tax expense (benefit)	(10,632		)	1,901			21,498			31,321
Net income (loss)	$	(35,209	)	$	6,089		$	81,739		$	97,370

Basic earnings (loss) per share	$	(0.87	)	$	0.15		$	2.01		$	2.39

Diluted earnings (loss) per share	$	(0.87	)	$	0.15		$	2.00		$	2.39

Dividends declared per share of common stock	$	0.385		$	0.360		$	1.540		$	1.440
Weighted average number of shares outstanding	40,653,326			40,582,936			40,623,151			40,543,986
Weighted average number of shares and dilutive potential shares outstanding	40,653,326			40,663,753			40,691,961			40,661,228

Three Months Ended Twelve Months Ended
March 31, March 31,
2019 2018 2019 2018
Operating revenues $ 174,363
$ 175,713
$ 902,253
$ 921,175
Operating expenses:
Fuel and purchased power 48,326
52,188
225,247
246,660
Operations and maintenance 80,413
80,160
335,136
321,254
Depreciation and amortization 25,126
23,814
97,694
92,723
Taxes other than income taxes 16,189
15,507
71,682
70,640
170,054
171,669
729,759
731,277
Operating income 4,309
4,044
172,494
189,898
Other income (deductions):
Allowance for equity funds used during construction 1,001
920
3,534
3,130
Investment and interest income, net 23,707
5,155
36,929
34,745
Miscellaneous non-operating income 3,048
3,136
12,735
12,292
Miscellaneous non-operating deductions (2,357 ) (2,743 ) (11,594 ) (11,494 )
25,399
6,468
41,604
38,673
Interest charges (credits):
Interest on long-term debt and revolving credit facility 18,989
17,988
76,425
72,591
Other interest 5,233
4,654
18,469
18,479
Capitalized interest (1,532 ) (1,214 ) (5,801 ) (4,942 )
Allowance for borrowed funds used during construction (972 ) (898 ) (3,686 ) (3,082 )
21,718
20,530
85,407
83,046
Income (loss) before income taxes 7,990
(10,018 ) 128,691
145,525
Income tax expense (benefit) 1,901
(3,052 ) 31,321
50,240
Net income (loss) $ 6,089
$ (6,966 ) $ 97,370
$ 95,285

Basic earnings (loss) per share $ 0.15
$ (0.17 ) $ 2.39
$ 2.35

Diluted earnings (loss) per share $ 0.15
$ (0.17 ) $ 2.39
$ 2.34

Dividends declared per share of common stock $ 0.360
$ 0.335
$ 1.440
$ 1.340
Weighted average number of shares outstanding 40,582,936
40,491,194
40,543,986
40,440,189
Weighted average number of shares and dilutive potential shares outstanding 40,663,753
40,491,194
40,661,228
40,563,625

See accompanying notes to financial statements.

EL PASO ELECTRIC COMPANY

STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)

(In thousands)


	Three Months Ended						Twelve Months Ended						Three Months Ended						Twelve Months Ended
	March 31,						March 31,						March 31,						March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Net income (loss)	$	6,089		$	(6,966	)	$	97,370		$	95,285		$	(35,209	)	$	6,089		$	81,739		$	97,370
Other comprehensive income (loss):
Unrecognized pension and post-retirement benefit costs:
Net gain (loss) arising during period	—			—			(5,898		)	12,634
Net loss arising during period													—			—			(12,110		)	(5,898		)
Reclassification adjustments included in net income for amortization of:
Prior service benefit	(2,186		)	(2,416		)	(9,427		)	(9,657		)	(1,651		)	(2,186		)	(8,205		)	(9,427		)
Net loss	843			1,575			5,655			6,657			1,445			843			4,017			5,655
Net unrealized gains/losses on marketable securities:
Net holding gains (losses) arising during period	2,471			(2,708		)	1,107			14,846
Net holding gains arising during period													—			2,471			3,601			1,107
Reclassification adjustments for net (gains) losses included in net income	829			518			1,756			(7,917		)	—			829			(3,061		)	1,756
Net losses on cash flow hedges:
Reclassification adjustment for interest expense included in net income	148			139			577			541			158			148			615			577
Total other comprehensive income (loss) before income taxes	2,105			(2,892		)	(6,230		)	17,104			(48		)	2,105			(15,143		)	(6,230		)
Income tax benefit (expense) related to items of other comprehensive income (loss):
Unrecognized pension and post-retirement benefit costs	265			156			2,144			(3,652		)	53			265			3,655			2,144
Net unrealized (gains) losses on marketable securities	(665		)	435			(577		)	(1,366		)
Net unrealized gains on marketable securities													—			(665		)	(233		)	(577		)
Losses on cash flow hedges	(48		)	(50		)	(143		)	(195		)	(30		)	(48		)	(129		)	(143		)
Total income tax benefit (expense)	(448		)	541			1,424			(5,213		)	23			(448		)	3,293			1,424
Other comprehensive income (loss), net of tax	1,657			(2,351		)	(4,806		)	11,891			(25		)	1,657			(11,850		)	(4,806		)
Comprehensive income (loss)	$	7,746		$	(9,317	)	$	92,564		$	107,176		$	(35,234	)	$	7,746		$	69,889		$	92,564

See accompanying notes to financial statements.

EL PASO ELECTRIC COMPANY

STATEMENTS OF CHANGES IN COMMON STOCK EQUITY

(Unaudited)

(In thousands except for share data)

Common Stock
Capital in
Excess of Stated Value
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss), Net of Tax
Treasury Stock

Common Stock Equity

Shares Amount Shares Amount
Balances at December 31, 2018 65,828,688
$ 65,829
$ 328,480
$ 1,227,471
$ (38,784 ) 25,147,567
$ (418,893 ) $ 1,164,103
Restricted common stock grants and deferred compensation (1,328 ) (31,461 ) 524
(804 )
Performance share awards vested 1,478
(39,923 ) 665
2,143
Stock awards withheld for taxes (430 ) 12,425
(207 ) (637 )
Forfeited restricted common stock 2,566
(43 ) (43 )
Compensation paid in shares 28
(669 ) 11
39
Net income 6,089
6,089
Other comprehensive income 1,657
1,657
Common stock, dividends declared, $0.36 per share (14,658 ) (14,658 )
Balances at March 31, 2019 65,828,688
$ 65,829
$ 328,228
$ 1,218,902
$ (37,127 ) 25,090,505
$ (417,943 ) $ 1,157,889



	Common Stock			Capital in Excess of Stated Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Treasury Stock					Common Stock Equity
	Common Stock												Treasury Stock
	Shares	Amount											Shares		Amount
Balances at December 31, 2019	64,428,688	$	64,429	$	323,367		$	1,272,418		$	(48,952	)	23,696,262		$	(394,715	)	$	1,216,547
Restricted common stock grants and deferred compensation				(40		)							(20,368	)	339			299
Performance share awards vested				197									(32,119	)	535			732
Stock awards withheld for taxes				(640		)							12,404		(206		)	(846		)
Compensation paid in shares				6									(118	)	3			9
Net loss							(35,209		)									(35,209		)
Other comprehensive loss										(25		)						(25		)
Common stock, dividends declared, $0.385 per share							(15,696		)									(15,696		)
Balances at March 31, 2020	64,428,688	$	64,429	$	322,890		$	1,221,513		$	(48,977	)	23,656,061		$	(394,044	)	$	1,165,811



	Common Stock			Capital in Excess of Stated Value			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Treasury Stock					Common Stock Equity
	Common Stock												Treasury Stock
	Shares	Amount											Shares		Amount
Balances at December 31, 2018	65,828,688	$	65,829	$	328,480		$	1,227,471		$	(38,784	)	25,147,567		$	(418,893	)	$	1,164,103
Restricted common stock grants and deferred compensation				(1,328		)							(31,461	)	524			(804		)
Performance share awards vested				1,478									(39,923	)	665			2,143
Stock awards withheld for taxes				(430		)							12,425		(207		)	(637		)
Forfeited restricted common stock													2,566		(43		)	(43		)
Compensation paid in shares				28									(669	)	11			39
Net income							6,089											6,089
Other comprehensive income										1,657								1,657
Common stock, dividends declared, $0.36 per share							(14,658		)									(14,658		)
Balances at March 31, 2019	65,828,688	$	65,829	$	328,228		$	1,218,902		$	(37,127	)	25,090,505		$	(417,943	)	$	1,157,889

Common Stock
Capital in
Excess of Stated Value
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss), Net of Tax
Treasury Stock

Common Stock Equity

Shares Amount Shares Amount
Balances at December 31, 2017 65,828,688
$ 65,829
$ 326,117
$ 1,159,667
$ 11,058
25,244,350
$ (420,506 ) $ 1,142,165
Restricted common stock grants and deferred compensation (560 ) (30,800 ) 513
(47 )
Performance share awards vested 360
(68,379 ) 1,139
1,499
Stock awards withheld for taxes (725 ) 20,389
(339 ) (1,064 )
Forfeited restricted common stock 2,391
(40 ) (40 )
Compensation paid in shares 35
(1,008 ) 17
52
Cumulative effect adjustment for financial instruments 41,028
(41,028 ) —
Net loss (6,966 ) (6,966 )
Other comprehensive loss (2,351 ) (2,351 )
Common stock, dividends declared, $0.335 per share (13,615 ) (13,615 )
Balances at March 31, 2018 65,828,688
$ 65,829
$ 325,227
$ 1,180,114
$ (32,321 ) 25,166,943
$ (419,216 ) $ 1,119,633

See accompanying notes to financial statements.

EL PASO ELECTRIC COMPANY

STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2019			2018			2020			2019
Cash flows from operating activities:
Net income (loss)	$	6,089		$	(6,966	)	$	(35,209	)	$	6,089
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization of electric plant in service	25,126			23,814			26,466			25,126
Amortization of nuclear fuel	10,706			10,404			10,739			10,706
Deferred income taxes, net	1,236			(3,964		)	(10,718		)	1,236
Allowance for equity funds used during construction	(1,001		)	(920		)	(586		)	(1,001		)
Other amortization and accretion	5,173			5,240			4,937			5,173
Net losses (gains) on decommissioning trust funds	(15,989		)	2,509			33,164			(15,989		)
Other operating activities	349			81			(163		)	349
Change in:
Accounts receivable	8,352			8,063			9,021			8,352
Inventories	(2,110		)	1,418			1,718			(2,110		)
Prepayments and other	(5,519		)	(2,603		)	(4,403		)	(5,519		)
Accounts payable	(11,021		)	(23,324		)	(22,071		)	(11,021		)
Taxes accrued	(8,827		)	(7,552		)	(12,110		)	(8,827		)
Interest accrued	2,971			6,590			4,724			2,971
Net over-collection of fuel revenues	12,799			7,965
Net over-collection (under-collection) of fuel revenues							(6,174		)	12,799
Other current liabilities	1,599			6,697			2,694			1,599
Deferred charges and credits	(3,513		)	(1,216		)	(3,513		)	(3,513		)
Net cash provided by operating activities	26,420			26,236
Net cash provided by (used for) operating activities							(1,484		)	26,420
Cash flows from investing activities:
Cash additions to utility property, plant and equipment	(52,428		)	(66,924		)	(50,897		)	(52,428		)
Cash additions to nuclear fuel	(9,502		)	(9,257		)	(12,590		)	(9,502		)
Insurance proceeds received for equipment	—			4,175
Proceeds from insurance							4,591			—
Capitalized interest and AFUDC:
Utility property, plant and equipment	(1,973		)	(1,818		)	(1,471		)	(1,973		)
Nuclear fuel and other	(1,532		)	(1,214		)	(1,378		)	(1,532		)
Allowance for equity funds used during construction	1,001			920			586			1,001
Decommissioning trust funds:
Purchases, including funding of $0.5 million and $0.5 million, respectively	(37,613		)	(33,578		)	(3,073		)	(37,613		)
Sales and maturities	35,468			31,663			1,406			35,468
Other investing activities	(724		)	526			829			(724		)
Net cash used for investing activities	(67,303		)	(75,507		)	(61,997		)	(67,303		)
Cash flows from financing activities:
Dividends paid	(14,658		)	(13,615		)	(15,696		)	(14,658		)
Borrowings under the revolving credit facility:
Proceeds	215,196			192,670			202,095			215,196
Payments	(61,452		)	(133,136		)	(75,115		)	(61,452		)
Payment on purchase in lieu of redemption of pollution control bonds	(63,500		)	—
Payment on repurchase of pollution control bonds							—			(63,500		)
Other financing activities	(653		)	(1,064		)	(1,242		)	(653		)
Net cash provided by financing activities	74,933			44,855			110,042			74,933
Net increase (decrease) in cash, cash equivalents and restricted cash	34,050			(4,416		)
Net increase in cash, cash equivalents and restricted cash							46,561			34,050
Cash, cash equivalents and restricted cash at beginning of period	12,900			6,990			10,818			12,900
Cash, cash equivalents and restricted cash at end of period	$	46,950		$	2,574		$	57,379		$	46,950

See accompanying notes to financial statements.

~~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 (the "Company") on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 ("~~2018~~2019 Form 10-K"). Capitalized terms used in this report and not defined herein have the meaning ascribed to such terms in the ~~2018~~2019 Form 10-K. In the opinion of the Company’s management, the accompanying financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, ~~2019~~2020 and December 31, ~~2018~~2019; the results of its operations and comprehensive operations for the three and twelve months endedMarch 31, ~~2019~~2020 and ~~2018~~2019; changes in common stock equity for the three months ended March 31, 2020 and 2019; and its cash flows for the three months endedMarch 31, ~~2019~~2020 and ~~2018~~2019. The results of operations, ~~and~~ comprehensive operations and the changes in common stock equity for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, and the cash flows for the three months endedMarch 31, ~~2019~~2020 and ~~2018,~~2019, are not necessarily indicative of the results to be expected for the full calendar year.

Pursuant to the rules and regulations of the United States ("U.S.") 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 U.S. Generally Accepted Accounting Principles ("GAAP").

Coronavirus Disease 2019 ("COVID-19") Impacts. On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the U.S. declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state, and local governments have imposed varying degrees of restrictions on business and social activities to contain the spread of COVID-19, including quarantine and “stay-at-home” orders and directives in the Company's service territory. The pandemic and directives have significantly impacted many sectors of the economy, including record levels of unemployment, with businesses, nonprofit organizations, and governmental entities modifying, curtailing or ceasing normal operations. The Company also modified certain business practices to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization, and other governmental and regulatory authorities.

While the Company continues to assess the impact of COVID-19 on its business, the Company cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the markets will have on its business, cash flows, liquidity, financial condition, and results of operations at this time, due to the numerous uncertainties that exist. The ultimate impact will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments and/or vaccines, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. An extended slowdown of economic growth in the U.S. could result in lower growth and reduced demand for and usage of electricity in the Company's service territory as facilities continue to close or remain closed. The ability of customers, contractors and suppliers to meet their obligations to the Company, including payment obligations, could also be affected under the current economic conditions.

Agreement and Plan of Merger. On June 1, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among the Company, Sun Jupiter Holdings LLC, a Delaware limited liability company ("Parent"), and Sun Merger Sub Inc., a Texas corporation and wholly owned subsidiary of Parent ("Merger Sub"). Pursuant to the Merger Agreement, on and subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company (the "Merger"), with the Company continuing as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of the Infrastructure Investments Fund, an investment vehicle advised by J.P. Morgan Investment Management Inc. ("IIF"). See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for a discussion of the Merger.

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").~~obligations. Actual results could differ from those estimates.

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Operating Revenues. The Company accrues revenues for services rendered, including unbilled electric service revenues. The Company recognizes revenue associated with contracts with customers when performance obligations under the terms of the contract with the customer are satisfied. Revenue is measured as the amount of consideration the Company receives in exchange for transferring goods or providing services to the customer. Taxes collected concurrently with revenue producing activities are excluded from revenue. Unbilled revenues are recorded for estimated amounts of energy delivered in the period following the customer's last billing cycle to the end of the reporting period. Unbilled revenues are estimated based on monthly generation volumes and by applying an average revenue/kilowatt-hour ("kWh") to the number of estimated kWhs delivered but not billed. Accounts receivable included accrued unbilled revenues of $~~19.3~~18.3 million at March 31, ~~2019~~2020 and $~~21.6~~25.6 million at December 31, ~~2018~~2019.

The Company’s Texas retail customers are billed under base rates and a fixed fuel factor approved by the Public Utility Commission of Texas ("PUCT"). The Company’s New Mexico retail customers are billed under base rates and a fuel adjustment clause that is adjusted monthly, as approved by the New Mexico Public Regulation Commission ("NMPRC"). The Company's Federal Energy Regulatory Commission ("FERC") sales for resale customers are billed under formula base rates and fuel factors and a fuel adjustment clause that is adjusted monthly. The Company’s recovery of fuel and purchased power expenses is subject to periodic reconciliations of actual fuel and purchased power expenses incurred to actual fuel revenues collected. The difference between fuel and purchased power expenses incurred and fuel revenues charged to customers is reflected as over/under-collection of fuel revenues, which is included in regulatory liabilities/assets - current in the balance sheets. See Part I, Item 1, Financial Statements, Note D of Notes to Financial Statements for further discussion.

Credit Losses. On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326). There was no cumulative effect adjustment at the initial application of the new standard. In addition, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the ongoing impact of the new standard to be immaterial to its financial position and results of operations and no significant changes in the Company's business processes and internal controls were necessary upon adoption of the new standard. The Company is exposed to credit losses as a result of recording customer receivables related to retail and wholesale electric sales and the provision of transmission services to customers. The allowance for doubtful accounts represents the Company’s estimate of existing accounts receivable that will ultimately be uncollectible. The allowance is calculated by applying estimated write-off factors to various classes of outstanding receivables. The write-off factors used to estimate uncollectible accounts are based upon consideration of both historical collections experience and management’s best estimate of future collections success given the existing collections environment and qualitative forecasts of future conditions. During the first quarter of 2020, the Company performed its assessment, which included consideration of the COVID-19 pandemic. Based on that assessment, the Company recorded a charge for anticipated uncollectible customer accounts. Additions, deductions and balances for the allowance for doubtful accounts for the three months ended March 31, 2020 and March 31, 2019 are as follows (in thousands):



	Three Months Ended
	March 31,
	2020			2019
Balance at beginning of period	$	1,900		$	2,070
Additions:
Increase to provision	676			217
Recovery of previous write-offs	340			342
Uncollectible receivables written off	(1,138		)	(1,115		)
Balance at end of period	$	1,778		$	1,514

Leases. The Company determines if an arrangement contains a lease and the classification of that lease at inception. Operating lease right-of-use ~~(“ROU”~~("ROU") assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make payments under the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the minimum lease payments over the lease term. In determining lease terms, the Company considers any options to extend or terminate the lease that are reasonably certain of being exercised. As the Company’s leases do not include an implicit rate, the Company uses an estimated incremental borrowing rate, at lease commencement, to determine the present value of the future lease payments. In calculating the incremental borrowing rate, the Company takes into consideration recent debt issuances and other data for instruments with similar characteristics. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants. For leases with lease and non-lease components,

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

the Company has elected to account for the consideration as a single lease component. The Company has also elected not to record leases with a term of 12 months or less on the balance sheets. The operating lease ROU assets are included as part of electric plant in service and lease liabilities are included as part of current and non-current liabilities in the Company’s balance sheets.

~~Table of Contents~~

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 property subject to composite depreciation 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.~~recognized, if applicable.

New Accounting Standards Adopted in 2020

In ~~February~~June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. Effective January 1, 2019, the Company adopted ASU 2016-02 using the modified retrospective method, applying the transition provisions to the beginning of the period of adoption rather than to the earliest comparative period presented, which continues to be reported in accordance with previous lease guidance, Accounting Standards Codification Topic 840. The Company adopted the package of practical expedients, which does not require the Company to reassess: (i) whether an arrangement contained a lease, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also adopted the practical expedient related to land easements, which allowed carry forward accounting treatment for existing land easements. The most significant impact of adopting ASU 2016-02, as of January 1, 2019, was the recording of approximately $6.3 million of operating lease liabilities and related ROU assets with no cumulative effect adjustment to retained earnings. The Company anticipates the ongoing impact of the new standard to be immaterial to net income and cash flows. See Part I, Item 1, Financial Statements, Note I of Notes to Financial Statements for further discussion.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), as a result of concerns raised due to the federal law commonly referred to as the Tax Cuts and Jobs Act of 2017 ("TCJA"). More specifically, because the remeasurement of deferred taxes due to the change in the federal corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income ("AOCI") (referred to as stranded tax effects) do not reflect the appropriate tax rate. ASU 2018-02 allows companies an election to reclassify stranded taxes from AOCI to retained earnings. The amount of the reclassification would be the difference between the historical federal corporate income tax rate of 35% and the newly enacted 21% federal corporate income tax rate, which approximates $7.2 million. The provisions of ASU 2018-02 are effective for fiscal years and interim periods within that reporting period beginning after December 15, 2018. The Company adopted ASU 2018-02 on January 1, 2019, and has elected to not reclassify stranded taxes from AOCI to retained earnings.

~~New Accounting Standards to be Adopted in the Future~~

~~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 expected credit loss model ~~will require~~requires 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.~~ ASU 2016-13 ~~will be~~is required for reporting periods beginning after December 15, 2019. ASU 2016-13 ~~will be~~was 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 adopted ASU 2016-13 on January 1, 2020. As part of its implementation process, the Company evaluated the impact of the new standard, which included evaluating the impact of (i) ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments and (ii) ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. The adoption of this standard did not have a material impact or require a cumulative effect adjustment to retained earnings. The Company anticipates the ongoing impact of ASU 2016-13 will be immaterial to the Company’s financial position, results of operations, and cash flows.

New Accounting Standards to be Adopted in the Future

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), as part of its initiative to reduce complexity in accounting standards. ASU 2019-12 amends the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim periods for reporting periods for which financial statements have not been issued. The Company is currently ~~assessing~~evaluating the future impact of ASU ~~2016-13.~~

2019-12.



Supplemental Cash Flow Disclosures (in thousands)
		Three Months Ended
		March 31,
		2020			2019
Cash paid (refunded) for:
	Interest on long-term debt and borrowings under the revolving credit facility	$	12,240		$	11,592
	Income tax paid (refunded), net	180			(300		)
Non-cash investing and financing activities:
	Changes in accrued plant additions	(288		)	(218		)
	Grants of restricted shares of common stock	339			524
	Issuance of performance shares	732			2,143
Non-cash operating activities:
	Operating lease liabilities arising (reducing) from obtaining ROU assets	(88		)	6,217

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Supplemental Cash Flow Disclosures (in thousands)
Three Months Ended
March 31,
2019 2018
Cash paid (received) for:
Interest on long-term debt and borrowings under the revolving credit facility $ 11,592
$ 11,967
Income tax refunded, net (300 ) (1,060 )
Non-cash investing and financing activities:
Changes in accrued plant additions (218 ) (108 )
Grants of restricted shares of common stock 524
513
Issuance of performance shares 2,143
1,499
Non-cash operating activities:
Operating lease liabilities arising from obtaining ROU assets 6,217
—

B. Revenues

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018, for all of its contracts using the modified retrospective method. There was no cumulative effect adjustment at the initial application of the new standard. In addition, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The following table disaggregates revenue from contracts with customers, for the three and twelve months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):



	Three Months Ended March 31,				Twelve Months Ended March 31,
	2020		2019		2020		2019
Retail	$	134,277	$	132,126	$	744,661	$	775,174
Wholesale	18,540		35,691		75,245		102,221
Wheeling (transmission)	5,079		6,005		21,695		20,745
Total revenues from contracts with customers	157,896		173,822		841,601		898,140
Other	667		541		4,593		4,113
Total operating revenues	$	158,563	$	174,363	$	846,194	$	902,253

Three Months Ended March 31, Twelve Months Ended March 31,
2019 2018 2019 2018
Retail $ 132,126
$ 146,628

$ 775,174
$ 826,148
Wholesale 35,691
24,143

102,221
72,641
Wheeling (transmission) 6,005
4,286
20,745
18,133
Total revenues from contracts with customers 173,822
175,057

898,140
916,922
Other 541
656
4,113
4,253
Total operating revenues $ 174,363
$ 175,713

$ 902,253
$ 921,175

Accounts receivable. Accounts receivable is principally comprised of revenue from contracts with customers. The Company recognizes expense for accounts that are deemed uncollectible in operating expense. The Company ~~recognized $0.2~~recorded $0.7 million and ~~$2.5~~$2.8 million ofto its provision for uncollectible ~~expense~~accounts for the three and twelve months ended March 31, ~~2019,~~2020, respectively.

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

C. Accumulated Other Comprehensive Income (Loss)



Changes in Accumulated Other Comprehensive Income (Loss) (net of tax) by component are presented below (in thousands):
		Three Months Ended March 31, 2020											Three Months Ended March 31, 2019
		Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt Securities		Net Losses on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)			Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt Securities			Net Losses on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)

Balance at beginning of period as previously reported		$	(38,491	)	$	—	$	(10,461	)	$	(48,952	)	$	(24,923	)	$	(2,942	)	$	(10,919	)	$	(38,784	)
	Other comprehensive income before reclassifications	—			—		—			—			—			1,973			—			1,973
	Amounts reclassified from accumulated other comprehensive income (loss)	(153		)	—		128			(25		)	(1,078		)	662			100			(316		)
Balance at end of period		$	(38,644	)	$	—	$	(10,333	)	$	(48,977	)	$	(26,001	)	$	(307	)	$	(10,819	)	$	(37,127	)


Upon adoption of ASU 2016-01, Financial Instruments - Overall, the Company recorded, on January 1, 2018, a cumulative effect adjustment, net of income taxes, to increase retained earnings by $41.0 million with an offset to AOCI. Changes in Accumulated Other Comprehensive Income (Loss) (net of tax) by component are presented below (in thousands):
		Three Months Ended March 31, 2019												Three Months Ended March 31, 2018
		Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt Securities			Net Losses on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)			Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt Securities			Net Losses on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)

Balance at beginning of period as previously reported		$	(24,923	)	$	(2,942	)	$	(10,919	)	$	(38,784	)	$	(17,790	)	$	40,190		$	(11,342	)	$	11,058
	Cumulative effect adjustment	—			—			—			—			—			(41,028		)	—			(41,028		)
	Other comprehensive income before reclassifications	—			1,973			—			1,973			—			(2,159		)	—			(2,159		)
	Amounts reclassified from accumulated other comprehensive income (loss)	(1,078		)	662			100			(316		)	(685		)	404			89			(192		)
Balance at end of period		$	(26,001	)	$	(307	)	$	(10,819	)	$	(37,127	)	$	(18,475	)	$	(2,593	)	$	(11,253	)	$	(32,321	)

		Twelve Months Ended March 31, 2019												Twelve Months Ended March 31, 2018													Twelve Months Ended March 31, 2020												Twelve Months Ended March 31, 2019
		Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt 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)				Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt Securities			Net Losses on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)			Unrecognized Pension and Post-retirement Benefit Costs			Net Unrealized Gains (Losses) on Debt Securities			Net Losses on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)

Balance at beginning of period as previously reported	Balance at beginning of period as previously reported	$	(18,475	)	$	(2,593	)	$	(11,253	)	$	(32,321	)	$	(24,457	)	$	32,872		$	(11,599	)	$	(3,184	)	Balance at beginning of period as previously reported	$	(26,001	)	$	(307	)	$	(10,819	)	$	(37,127	)	$	(18,475	)	$	(2,593	)	$	(11,253	)	$	(32,321	)
	Cumulative effect adjustment	—			—			—			—			—			(41,028		)	—			(41,028		)	Other comprehensive income before reclassifications	(9,424		)	2,682			—			(6,742		)	(4,589		)	892			—			(3,697		)
	Other comprehensive income before reclassifications	(4,589		)	892			—			(3,697		)	7,951			11,927			—			19,878			Amounts reclassified from accumulated other comprehensive income (loss)	(3,219		)	(2,375		)	486			(5,108		)	(2,937		)	1,394			434			(1,109		)
	Amounts reclassified from accumulated other comprehensive income (loss)	(2,937		)	1,394			434			(1,109		)	(1,969		)	(6,364		)	346			(7,987		)
Balance at end of period	Balance at end of period	$	(26,001	)	$	(307	)	$	(10,819	)	$	(37,127	)	$	(18,475	)	$	(2,593	)	$	(11,253	)	$	(32,321	)	Balance at end of period	$	(38,644	)	$	—		$	(10,333	)	$	(48,977	)	$	(26,001	)	$	(307	)	$	(10,819	)	$	(37,127	)

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Amounts reclassified from Accumulated Other Comprehensive Income (Loss) for the three and twelve months ended March 31, ~~2019~~2020 and ~~2018~~2019 are as follows (in thousands):



Details about Accumulated Other Comprehensive Income (Loss) Components		Three Months Ended March 31,						Twelve Months Ended March 31,						Affected Line Item in the Statements of Operations
		2020			2019			2020			2019			Affected Line Item in the Statements of Operations

Amortization of pension and post-retirement benefit costs:
	Prior service benefit	$	1,651		$	2,186		$	8,205		$	9,427		Miscellaneous non-operating income
	Net loss	(1,445		)	(843		)	(4,017		)	(5,655		)	Miscellaneous non-operating deductions
		206			1,343			4,188			3,772			Income (loss) before income taxes
	Income tax effect	(53		)	(265		)	(969		)	(835		)	Income tax expense (benefit)
		153			1,078			3,219			2,937			Net income (loss)

Marketable securities:
	Net realized gain (loss) on sale of securities	—			(829		)	3,061			(1,756		)	Investment and interest income, net
		—			(829		)	3,061			(1,756		)	Income (loss) before income taxes
	Income tax effect	—			167			(686		)	362			Income tax expense (benefit)
		—			(662		)	2,375			(1,394		)	Net income (loss)

Loss on cash flow hedge:
	Amortization of loss	(158		)	(148		)	(615		)	(577		)	Interest on long-term debt and revolving credit facility
		(158		)	(148		)	(615		)	(577		)	Income (loss) before income taxes
	Income tax effect	30			48			129			143			Income tax expense (benefit)
		(128		)	(100		)	(486		)	(434		)	Net income (loss)

	Total reclassifications	$	25		$	316		$	5,108		$	1,109

Details about Accumulated Other Comprehensive Income (Loss) Components Three Months Ended March 31, Twelve Months Ended March 31, Affected Line Item in the Statements of Operations
2019 2018 2019 2018

Amortization of pension and post-retirement benefit costs:
Prior service benefit $ 2,186
$ 2,416
$ 9,427
$ 9,657
Miscellaneous non-operating income
Net loss (843 ) (1,575 ) (5,655 ) (6,657 ) Miscellaneous non-operating deductions
1,343
841
3,772
3,000
Income (loss) before income taxes
Income tax effect (265 ) (156 ) (835 ) (1,031 ) Income tax (benefit) expense
1,078
685
2,937
1,969
Net income (loss)

Marketable securities:
Net realized gain (loss) on sale of securities (829 ) (518 ) (1,756 ) 7,917
Investment and interest income, net
(829 ) (518 ) (1,756 ) 7,917
Income (loss) before income taxes
Income tax effect 167
114
362
(1,553 ) Income tax (benefit) expense
(662 ) (404 ) (1,394 ) 6,364
Net income (loss)

Loss on cash flow hedge:
Amortization of loss (148 ) (139 ) (577 ) (541 ) Interest on long-term debt and revolving credit facility
(148 ) (139 ) (577 ) (541 ) Income (loss) before income taxes
Income tax effect 48
50
143
195
Income tax (benefit) expense
(100 ) (89 ) (434 ) (346 ) Net income (loss)

Total reclassifications $ 316
$ 192
$ 1,109
$ 7,987

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

D. Regulation

General

The rates and services of the Company are regulated by incorporated municipalities in Texas, the PUCT, the NMPRC and the 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 - full ~~requirement~~requirements customer) 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.

On June 1, 2019, the Company entered into the Merger Agreement. Pursuant to the Merger Agreement, on and subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of the IIF. Among other things, the Company, Parent and Merger Sub are required to obtain certain regulatory approvals of the Merger as discussed further in Part I, Item 1, Financial Statements, Note M of the Notes to Financial Statements.

On August 13, 2019, the Company, Parent and IIF US Holding 2 LP, an affiliate of IIF, as applicable, filed (i) the joint report and application for regulatory approvals with the PUCT requesting approval of the Merger pursuant to the Texas Public Utility Regulatory Act ("PURA"), which was assigned PUCT Docket No. 49849, (ii) the joint application for regulatory approvals with the NMPRC requesting approval of the Merger pursuant to the New Mexico Public Utility Act ("NMPUA") and NMPRC Rule 450, which was assigned NMPRC Case No. 19-00234-UT, (iii) the joint application requesting approval of the Merger with the FERC under Section 203 of the Federal Power Act, which was assigned FERC Docket No. EC19-120-000, and (iv) the joint application for regulatory approval for the indirect transfer of the Company’s Nuclear Regulatory Commission ("NRC") licenses to Parent from the NRC under the Atomic Energy Act of 1954, which was assigned Docket ID NRC-2019-0214. In addition, on August 13, 2019, the Company and Parent sought the authorization of the Federal Communications Commission ("FCC") to assign or transfer control of the Company’s FCC licenses under FCC File No. 008737430. On December 4, 2019, the Company and Parent received consent from the FCC to transfer the Company's FCC licenses.

On August 16, 2019, the Company and Parent filed the notification and report form with the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission ("FTC") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), as amended, and the rules and regulations promulgated thereunder, which was assigned Transaction Identification No. 2019 1858. On September 3, 2019, the Company and Parent received notice from the FTC granting early termination of the waiting period under the HSR Act.

On November 21, 2019, the Company and IIF reached an agreement in principle with the PUCT staff and most intervenors regarding the Merger. The PUCT issued an order delaying the hearing on the merits in order to assist in reaching a unanimous settlement. The parties continued discussions and provided an update on the status of settlement at the PUCT meeting on December 13, 2019. A non-unanimous settlement was filed with the PUCT on December 18, 2019, resolving substantially all issues in the application. The hearing at the PUCT on the non-unanimous issues was held on January 7, 2020, at the conclusion of which the PUCT requested the Company and IIF attend the PUCT's January 16, 2020 open meeting to answer any follow-up questions. On January 16, 2020, the PUCT approved the Merger and issued its final order on January 28, 2020.

On January 3, 2020, the Company and IIF filed an unopposed stipulation with the NMPRC regarding the Merger. A hearing at the NMPRC for the unopposed stipulation was held on January 16, 2020. On January 16, 2020, the Hearing Examiner of the NMPRC (the "Hearing Examiner") agreed with the consent of parties to waive briefing. On February 12, 2020, the Hearing Examiner issued an Amended Certification of the Stipulation in which it is recommended that the NMPRC approve the unopposed stipulation subject to the parties agreeing to the Hearing Examiner's modifications. A final order adopting the Certification of the Stipulation and approving the Merger was issued by the NMPRC on March 11, 2020.

On December 5, 2019, the FERC requested additional information regarding the parties to the Merger. On January 6, 2020, the Company and IIF filed a joint response to the FERC's inquiry. On January 17, 2020, the Company and IIF filed a second supplement to the application. The FERC established a January 27, 2020 deadline date for comments on the filings. Several motions to intervene were filed, along with a protest of the January 6, 2020 response. On February 6, 2020, the Company and IIF filed a reply to the January 27, 2020 protest. On March 30, 2020, the FERC issued an order authorizing the Merger, subject to the FERC’s approval of mitigation to address certain discrete competitive effects of the Merger that could arise. The FERC concluded that the Merger, as conditioned, satisfies governing federal standards and authorized the Merger as consistent with the public interest. The FERC required that the proposed mitigation be filed within 45 days of the issuance of the FERC Order. On April 15, 2020, the

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Company and IIF filed proposed mitigation options with the FERC. The matter is pending final approval from the FERC.

The FERC’s final approval is the last regulatory approval needed to close the Merger. The Company anticipates that the closing of the Merger will occur in the second quarter of 2020, upon the FERC’s approval of the required mitigation and satisfaction or waiver of the other Merger Agreement closing conditions.

Texas Regulatory Matters

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 ~~the 2017 Texas Retail Rate Case,~~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 2017 Texas Retail Rate Case.~~

On December 18, 2017, the PUCT issued ~~the PUCT Final Order~~a final order in Docket No. 46831 ~~("2017~~(the "2017 PUCT Final Order"), 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 Generating Station ("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 established baseline revenue requirements for recovery of future transmission and distribution investment costs (for which the Company could seek recovery after January 1, 2019) 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 allowed 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 allowed 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, which expired on January 9, 2019, with a reconciliation of any over-or under-charge to be addressed in a separate proceeding.

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. The surcharge for the relate back of rates expired on January 9, 2019.

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..

The 2017 PUCT Final Order required the Company to file a refund tariff if the federal statutory income tax rate, as it relates to the Company, was decreased before the Company files its next general rate case. Following the enactment of the ~~TCJA~~federal legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "TCJA") on December 22, 2017, and in compliance with the 2017 PUCT Final Order, on March 1, 2018, the Company filed with the PUCT and each of its Texas municipalities a proposed refund tariff designed to reduce base charges for Texas customers equivalent to the expected annual decrease of $22.7 million in federal income tax expense resulting from the TCJA changes, and an additional refund of $4.3 million for the amortization of a regulatory liability related to the reduced tax expense for the months of January through March of 2018. This filing was assigned PUCT Docket No. 48124. On March 27, 2018, the PUCT approved the Company's proposed refund tariff on an interim basis, subject to refund or surcharge, for customer billing effective April 1, 2018. Each of the Company's municipalities also implemented the Company's proposed tax credits on an interim basis effective April 1, 2018. The refund is reflected in rates over a period of one year beginning April 1, 2018, and ~~will~~is required to be updated annually until new base rates are implemented pursuant to the Company's next Texas rate case filing. The PUCT issued an order on December 10, 2018, approving the proposed refund tariff. On February 22, 2019, the Company filed with the PUCT and each of its Texas municipalities an application to modify the tax refund tariff to remove the portion of the base rate credit associated with the $4.3 million of regulatory liability amortization, which expired March 31, 2019. The filing was assigned PUCT Docket No. ~~49251.~~49251 and approved by final order on June 27, 2019. On February 20, 2020, the Company filed its required annual update of the refund factor with the PUCT and each of its Texas municipalities. In its application, the Company proposed that the existing refund factors remain in effect. The filing is currently pending as PUCT Docket No. 50575.

~~Table of Contents~~

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Texas Energy Efficiency Cost Recovery Factor ("EECRF"). On May 1, 2017, the Company filed its annual application with the PUCT, 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 reconciliation of collections to prior year actual costs, the Company requested approval of an incentive bonus for the 2016 energy efficiency program results in accordance with PUCT rules. Interim rates were approved effective January 1, 2018. The Company, the PUCT Staff and the City of El Paso reached an agreement that includes an incentive bonus of $0.8 million. The agreement was filed on January 25, 2018, and was approved by the PUCT on February 15, 2018.

On May 1, 2018, the Company filed its annual application with the PUCT, which was assigned PUCT Docket No. 48332, to establish its ~~energy efficiency cost recovery factor~~EECRF for 2019. In addition to projected energy efficiency costs for 2019 and a reconciliation of collections to actual costs for the prior year, the Company requested approval of a $1.0 million incentive bonus for the 2017 energy efficiency program results in accordance with PUCT rules. Instead of convening a live hearing on the merits of this case, the parties agreed to enter into the record the pre-filed testimony of the parties and certain other exhibits and then file briefs on the contested issues. The Administrative Law Judge ("ALJ") issued a proposal for final decision on November 15, 2018, including the Company's fully requested incentive bonus. On January 17, 2019, the PUCT issued a final order approving a modified bonus amount of $0.9 million.

On May 1, 2019, the Company filed its annual application with the PUCT, which was assigned PUCT Docket No. 49496, to establish its ~~energy efficiency cost recovery factor~~EECRF for 2020. In addition to projected energy efficiency costs for 2020 and a reconciliation of collections to actual costs for the prior year, the Company ~~anticipates requesting an~~requested approval ~~for an amount to be determined~~of a $0.8 million incentive bonus for the 2018 energy efficiency program results in accordance with PUCT rules. On July 1, 2019, the Company requested, and received approval for, a suspension of the procedural schedule in order to pursue settlement of the case. On July 12, 2019, the Company informed the ALJ in the case that all parties had agreed in principle on terms for settlement. On August 14, 2019, the Company filed an unopposed settlement agreement and proposed order which resolved all issues in the proceeding, including the requested incentive bonus. The case was remanded on August 16, 2019, to the PUCT for a final order approving the settlement agreement and the Company's EECRF rates. On November 14, 2019, the PUCT issued an order approving the filed settlement.

On May 1, 2020, the Company ~~cannot predict~~filed its annual application with the ~~outcome~~PUCT, which was assigned PUCT Docket No. 50806, to establish its EECRF for 2021. In addition to projected energy efficiency costs of ~~this filing at this time.~~$4.7 million for 2021 and a reconciliation of collections to actual costs for the prior year, the Company requested approval of a $1.2 million incentive bonus for the 2019 energy efficiency program results in accordance with PUCT rules.

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Fuel and Purchased Power Costs. The Company's actual fuel costs, including purchased power energy costs, net of the cost of off-system sales and related shared margins, are recovered from customers through a fixed fuel factor. The PUCT has adopted a fuel cost recovery rule ("Texas Fuel Rule") that allows the Company to seek periodic adjustments to its fixed fuel factor. The Company can seek to revise its fixed fuel factor based upon the approved formula at least four months after its last revision except in the month of December. The Texas Fuel Rule requires the Company to request to refund fuel costs in any month when the over-recovery balance exceeds a threshold material amount and it expects fuel costs to continue to be materially over-recovered. The Texas Fuel Rule also permits the Company to seek to surcharge fuel under-recoveries in any month the balance exceeds a threshold material amount and it expects fuel cost recovery to continue to be materially under-recovered. Fuel over- and under-recoveries are considered material when they exceed 4% of the previous twelve months' fuel costs. All such fuel revenue and expense activities are subject to periodic final review by the PUCT in periodic fuel reconciliation proceedings.

On October 13, 2017, the Company filed a request with the PUCT, which was assigned PUCT Docket No. 47692, 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.

On April 13, 2018, the Company filed a request with the PUCT, which was assigned PUCT Docket No. 48264, to decrease the Texas fixed fuel factor by approximately 29% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On April 25, 2018, the Company's proposed fuel factors were approved on an interim basis effective for the first billing cycle of the May 2018 billing month. The revised factor was approved by the PUCT and the docket closed on May 22, 2018.

On October 15, 2018, the Company filed a request with the PUCT, which was assigned PUCT Docket No. 48781, to decrease the Texas fixed fuel factor by approximately 6.99% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On October 25, 2018, the Company's fixed fuel factor was approved on an interim basis effective for the first billing cycle of the November 2018 billing month. The revised factor was approved by the PUCT and the docket closed on November 19, 2018. The Texas fixed fuel factor will continue thereafter until changed by the PUCT. As of March 31, 2019, the Company had a net fuel over-recovery balance of approximately $19.3 million in Texas.

On April 29, 2019, the Company filed a petition with the PUCT, which was assigned PUCT Docket No. 49482, requesting authority to implement, beginning on June 1, 2019, a four-month, interim fuel refund of $19.4 million in fuel cost over-recoveries, including interest, for the period from April 2016 through March 2019. On May 30, 2019, the Company's fuel refund credit was approved on an interim basis. The Company ~~cannot predict~~implemented the ~~outcome~~fuel refund in customer bills beginning June 1, 2019. On September 27, 2019, the PUCT issued a final order approving the fuel refund credits. The fuel refund was completed on September 30, 2019, with a total fuel refund of ~~this filing at this time.~~$20.1 million, including interest, returned to Texas customers.

On September 13, 2019, the Company filed a request with the PUCT, which was assigned PUCT Docket No. 49960, to decrease the Texas fixed fuel factor by approximately 12.2% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On September 25, 2019, the Company's fixed fuel factor was approved by the PUCT on an interim basis effective for the first billing cycle of the October 2019 billing month. The Texas fixed fuel factor was determined to be final on October 15, 2019, and will continue until changed by the PUCT.

~~Table~~On November 26, 2019, the Company filed a petition with the PUCT, which was assigned PUCT Docket No. 50292, requesting authority to implement, beginning on January 1, 2020, a three-month, interim fuel refund of ~~Contents~~$15.0 million in fuel cost over-recoveries for the period from April 2019 through October 2019, including interest for the period from April 2019 through March 2020. On December 12, 2019, the Company’s fuel refund credit was approved on an interim basis. The Company implemented the fuel refund in customer bills beginning January 1, 2020, and completed the refund period on March 31, 2020, during which $14.0 million was refunded. On March 26, 2020, the PUCT issued a final order approving the fuel refund credits. As of March 31, 2020, the Company had a net fuel over-recovery balance of approximately $8.8 million in Texas.

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Fuel Reconciliation Proceeding. On September 27, ~~2016,~~2019, the Company filed an application with the PUCT, ~~designated as~~which was assigned PUCT Docket No. ~~46308,~~50058, to reconcile ~~$436.6~~$363.0 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 provided for the reconciliation of fuel and purchased power costs incurred from April 1, 2013, through March 31, 2016. The financial results for the twelve months ended March 31, 2018, included a $5.0 million, pre-tax increase to income reflecting the settlement of the Texas fuel reconciliation proceeding. This amount represents Palo Verde Generating Station ("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. Additionally, the settlement modified and tightened the Palo Verde performance rewards measurement bands beginning with the 2018 performance period.

~~The April 1,~~ 2016, through March 31, 2019. The Company cannot predict the outcome of this filing at this time. The April 1, 2019, through March 31, 2020, Texas jurisdictional fuel and purchased power costs subject to a future prudence review ~~by the PUCT later this year~~ total approximately ~~$361.5~~$61.7 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 three-megawatt ("MW") solar photovoltaic system located at Montana Power Station ("MPS"). Participation is on a voluntary basis, and customers 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 three-MW program was fully subscribed by approximately 1,500 Texas customers. The Community Solar facility began commercial operation on May 31, 2017.

On March 20, 2018, the Company filed a petition with the PUCT and each of its Texas municipalities to expand its community solar program in Texas to include ~~two-MW~~2-megawatts ("MW") of solar powered generation from the ~~ten-MW~~10-MW solar photovoltaic facility located at Newman Power Station ("Newman") and to reduce rates under the community solar tariff. The case before the PUCT was assigned PUCT Docket No. 48181 and a hearing was held on December 4, 2018. The ~~Administrative Law Judge~~ALJ issued a proposal for decision on March 19, 2019, that approved the project as proposed by the Company. ~~The Company awaits a final order from~~On May 9, 2019, the PUCT approved the Company's request to expand the program utilizing the 2-MW of solar powered generation available from Newman. New subscriptions for the expanded program were accepted beginning in June 2019, and ~~cannot predict~~new rates for all existing and new customers were implemented in customer bills beginning July 1, 2019. As of June 30, 2019, the ~~outcome of the case at this time.~~expanded program was fully subscribed.

Transmission Cost Recovery ~~Factor.~~Factor ("TCRF"). On January 25, 2019, the Company filed an application with the PUCT to establish its ~~Transmission Cost Recovery Factor ("TCRF"),~~TCRF, which was assigned PUCT Docket No. 49148 (the "2019 TCRF rate filing"). The 2019 TCRF rate filing iswas designed to recover a requested $8.2 million of Texas jurisdictional transmission revenue requirement that iswas not ~~currently~~ being recovered in the Company's Texas base rates for transmission-related investments placed in service from October 1, 2016, through September 30, 2018, net of retirements. On ~~April 30,~~September 12, 2019, the Company ~~revised~~filed an unopposed settlement agreement and proposed order for a TCRF revenue requirement of $7.5 million with a provision for recovery of revenue relating to the ~~request~~period from July 30, 2019 to ~~$8.1~~December 31, 2019. Such revenue through December 31, 2019, approximated $3.0 million. On December 16, 2019, the PUCT issued a final order approving the settlement agreement, and the Company's TCRF rates became effective in customer bills beginning January 1, 2020. On January 14, 2020, the Company filed with the PUCT a proposed surcharge in

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

compliance with the final order issued in PUCT Docket No. 49148 for recovery of the $3.0 million related to ~~reflect~~2019, over a ~~reclassified item that would likely be included in~~period of 12 months beginning on April 1, 2020. The filing was assigned PUCT Docket No. 50256, and on February 7, 2020, the surcharge was approved through delegated authority by a ~~future~~ Commission ALJ.

Distribution Cost Recovery Factor ("DCRF") ~~filing. The Company cannot predict~~. On March 28, 2019, the ~~outcome of this filing at this time.~~

~~Distribution Cost Recovery Factor. The~~ Company filed an application with the PUCT and each of its Texas municipalities to establish its DCRF, ~~on March 28, 2019 (the "2019 DCRF rate filing"). The case~~which was assigned PUCT Docket No. ~~49395.~~49395 (the “2019 DCRF rate filing”). The 2019 DCRF rate filing iswas designed to recover a requested $7.9 million of Texas jurisdictional distribution revenue requirement that iswas not ~~currently~~ being recovered in the Company’s Texas base rates for distribution-related investments placed in service from October 1, 2016, through December 31, 2018, net of retirements. On August 13, 2019, the Company filed an unopposed settlement agreement and proposed order which resolved all issues in the proceeding and approved a DCRF revenue requirement of $7.8 million. On September 27, 2019, the PUCT issued a final order approving the settlement agreement, and the Company's DCRF rates became effective in customer bills beginning October 1, 2019.

Newman Unit 6 Certificate of Convenience and Necessity ("CCN"). On November 22, 2019, the Company filed an application with the PUCT for a CCN to own and operate a new, approximately 228 MW, natural gas-fired unit to be constructed at Newman. The case was assigned PUCT Docket No. 50277. The proposed unit is called Newman Unit 6. An air permit application for Newman Unit 6 was concurrently submitted to the Texas Commission on Environmental Quality. The new unit was selected through a competitive bidding process and is needed to serve growth in customer demand, to replace older and less efficient generators that the Company plans to retire in the next several years, and to help the Company meet its planning reserve margin. The Company cannot predict the outcome of these filings at this time.

Merger Rate Credit. On March 13, 2020, the Company filed an application with the PUCT and each of its Texas municipalities to implement a Merger rate credit of $21.0 million over 36 months, which was assigned PUCT Docket No. 50477. The final order that approved the Merger in Docket No. 49849 required the Company to file for approval of the Merger rate credit within 45 days after the issuance of that final order. The Company cannot predict the outcome of this filing at this time.

COVID-19 Orders. On March 13, 2020, in response to the growing threat of COVID-19, Governor Greg Abbott issued a Declaration of State of Disaster for all counties in Texas. On March 16, 2020, the PUCT opened Docket No. 50664 for Issues Related to the State of Disaster for the Coronavirus Disease 2019. That same day, the PUCT issued an order suspending certain of its rules related to filings and procedural requirements.

On March 26, 2020, the PUCT issued an order finding that the public emergency and imperative public necessity constitute good cause to grant exemptions to its rules related to utility authorization to disconnect service for nonpayment and the assessment of late fees for delinquent bills. On the same day, the PUCT issued a second order to provide regulated utility companies regulatory certainty by authorizing the use of an accounting mechanism and a subsequent process through which regulated utility companies may seek future recovery of expenses resulting from the effects of COVID-19. The PUCT order authorized electric, water, and sewer utilities to record as regulatory assets expenses resulting from the effects of COVID-19, including but not limited to non-payment of qualified customer bills as specified by the prior order. In future proceedings, the PUCT indicated it would consider whether each utility's request for recovery of these regulatory assets is reasonable and necessary.

On April 12, 2020, Governor Abbott renewed the disaster declaration proclamation for all counties in Texas. Finding that good cause continues to exist, the PUCT on April 17, 2020, extended its order finding exceptions to its rules until May 15, 2020, for residential customers.

Other Required Approvals. The Company has obtained other required approvals for tariffs and other approvals required by the ~~Texas Public Utility Regulatory Act~~PURA and the PUCT.

New Mexico Regulatory Matters

Future New Mexico Rate Case Filing. The Company was required to file its next New Mexico base rate case no later than July 31, 2019. On ~~April 12, 2017,~~July 10, 2019, the NMPRC issued an order ~~in Case No. 15-00109-UT requiring~~approving a joint request by the Company, NMPRC staff, and the New Mexico Attorney General to delay filing of the Company's next base rate case until after the conclusion of a proceeding addressing the Merger. The NMPRC order requires the Company to ~~make a~~file its next rate ~~filing~~case application within three months of the final disposition of the proceeding addressing the Merger in New ~~Mexico no later than July 31, 2019, using an appropriate historical test year period. The Company expects to file its New Mexico rate case using a December 31, 2018, historical test year period~~Mexico. A final order approving the Merger was issued by the NMPRC on ~~July 31, 2019.~~March 11, 2020.

New Mexico Order Commencing Review of the Effects of the TCJA on Regulated New Mexico Utilities. On January 24, 2018, the NMPRC initiated a proceeding in Case No. 18-00016-UT on the impact of the TCJA on New Mexico regulated utilities. On ~~February 23, 2018, the Company responded to a NMPRC Staff inquiry regarding the proceeding. On~~

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April 4, 2018, the NMPRC issued an order requiring the Company to file a proposed interim rate rider to adjust the Company's New Mexico base revenues in amounts equivalent to the Company's reduced income tax expense for New Mexico customers resulting from the TCJA, to be implemented on or before May 1, 2018. The NMPRC order further requires that the Company record and track a regulatory liability for the excess accumulated deferred income taxes ("ADIT") created by the change in the federal corporate income tax rate, consistent with

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the effective date of the TCJA, and subject to amortization determined by the NMPRC in the Company's next general rate case. The Company recorded such a regulatory liability ~~during the quarter ended December 31,~~in 2017. On April 16, 2018, after consultation with the New Mexico Attorney General pursuant to the NMPRC order, the Company filed an interim rate rider with the NMPRC with a proposed effective date of May 1, 2018. The annualized credits expected to be refunded to New Mexico customers approximate $4.9 million. The Company implemented the interim rate rider in customer bills beginning May 1, 2018 pursuant to the NMPRC order.

On September 5, 2018, the NMPRC issued an order in Case No. 17-00255-UT involving the request of Southwestern Public Service ~~Company’s~~Company ("~~SPS’s"~~SPS") ~~request~~ to change rates in which the NMPRC directed SPS to refund the difference in corporate tax rate from January 1, 2018, through the effective date of new rates. SPS appealed the NMPRC order to the New Mexico Supreme Court in Southwestern Public Service Co. v. NMPRC, No. S-1-SC-37248 ("SPS Appeal No. 1"), challenging the refund as prohibited retroactive ratemaking among other reasons. The New Mexico Supreme Court issued a partial and interim stay of the rates on September 26, 2018. On September 12, 2018, the NMPRC in Case No. 18-00016-UT issued an Order Regarding the Disposition of Tax Savings Under the Federal Tax Cuts and Jobs Act of 2017, which put public utilities on notice that all revenue collected through general rates for the purpose of payment of federal income taxes is and will continue to be subject to possible refund upon a subsequent determination to be made in the appropriate pending or future NMPRC adjudicatory hearing. On October 11, 2018, SPS filed a Notice of Appeal of that NMPRC order to the New Mexico Supreme Court in Southwestern Public Service Co. v. NMPRC, No. S-1-SC-37308 ("SPS Appeal No. 2"). On February 15, 2019, the NMPRC and SPS filed a joint motion for remand and stipulated dismissal of SPS appeals of NMPRC orders with the New Mexico Supreme Court, which among other things, reflected agreements between the NMPRC and SPS, which in part provide that the NMPRC will replace the order in Case No. 17-00255-UT with a new order that eliminates the retroactive TCJA refund and that SPS will request dismissal of SPS ~~Appeals~~ AppealNo. 1 and SPS Appeal No. 2.2. On February 28, 2019, the New Mexico Supreme Court remanded SPS Appeal No. 1 back to the NMPRC and dismissed the appeal. On March 6, 2019, the NMPRC issued a revised final order on remand in Case No. 17-00255-UT that, in part, eliminated the retroactive TCJA refund.

Fuel and Purchased Power Costs. Pursuant to NMPRC Rule 550, fuel and purchased power costs, net of the cost of off-system sales and related shared margins, are reconciled to actual costs on a monthly basis and recovered or refunded to customers the second succeeding month through the New Mexico Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC"). ~~Additionally, the Renewable Portfolio Standard ("RPS") costs for New Mexico are recovered through a separate RPS Cost Rider that is updated annually.~~ The Company must file an application for continued use of its FPPCAC no more than four years from the date its last FPPCAC was continued. As required, the Company filed a request to continue use of its ~~Fuel and Purchased Power Cost Adjustment Clause ("FPPCAC")~~FPPCAC with the NMPRC on January 5, 2018, which was assigned Case No. 18-00006-UT. The NMPRC issued a final order in the case on February 13, 2019, which authorized the Company to continue use of its FPPCAC without change and approved the Company's reconciliation of its fuel and purchased power costs for the period January 1, 2015, through December 31, 2016. New Mexico jurisdictional fuel and purchased power costs subject to a future prudence review are fuel and purchased power costs from January 1, 2017, through March 31, ~~2019,~~2020 that total approximately ~~$96.4~~$116.6 million. At March 31, ~~2019,~~2020, the Company had a net fuel over-recovery balance of approximately ~~$2.5~~$0.8 million related to the FPPCAC in New Mexico.

Amendments to the New Mexico Renewable Energy Act (the "REA"). The REA requires electric utilities to meet a Renewable Portfolio ~~Standard.~~ Standard ("RPS") of 20 percent of its total retail sales to New Mexico customers by 2020. Effective June 14, 2019, the New Mexico Energy Transition Act amended the REA (the "Amended REA") to, among other things: (i) increase the RPS to 40 percent by 2025, 50 percent by 2030, and 80 percent by 2040; (ii) impose a zero-carbon standard by 2045; (iii) eliminate the reduction to the RPS requirement for sales to qualifying large non-governmental customers whose costs are capped under the REA; (iv) set a statutory reasonable cost threshold; and (v) provide cost recovery for certain undepreciated investments and decommissioning costs, such as coal-fired generation, associated with generation required by the NMPRC to be discontinued and replaced with lower or zero-carbon generation. In administering the 80 percent RPS and zero-carbon standards, the Amended REA requires the NMPRC to consider certain factors, including safety, reliability and rate impact to customers. On October 10, 2019, the NMPRC initiated a rulemaking proceeding to implement the Amended REA in Case No. 19-00296-UT. The Company is currently evaluating the impact that the Amended REA may have on its operations. Further, the Company has not determined the costs associated with complying with the Amended REA including potential fines that could be associated with non-compliance.

New Mexico RPS. Effective January 1, 2018, pursuant to the final order in NMPRC Case No. 17-00090-UT, the RPS costs for New Mexico are recovered through a separate RPS Cost Rider and not through the FPPCAC. At March 31, ~~2019,~~2020, the Company had a net fuel over-recovery balance related to the RPS Cost Rider of approximately ~~$1.9~~$2.5 million. The RPS Cost Rider is updated

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in an annual NMPRC filing, including a reconciliation of the prior year’s RPS costs and RPS Cost Rider revenue.

~~5-MW Holloman Air Force Base ("HAFB") Facility Certificate of Convenience and Necessity ("CCN")~~. On October ~~7, 2015,~~1, 2019, in Case No. ~~15-00185-UT,~~19-00099-UT, the Company filed its required application with the NMPRC for approval of its 2019 Annual Renewable Plan and for adjustment of its RPS Cost Rider for reconciliation of 2018 costs and revenues and to recover RPS costs for 2020. On November 18, 2019, following a second prehearing conference, the Hearing Examiner issued an order suspending the procedural schedule in order to allow the Company to amend its filed plan after the completion of an ongoing Request for Proposals to solicit possible new resources, by no later than March 31, 2020. The order suspending the procedural schedule also required the Company to file a ~~final order approving~~revised RPS Cost Rider to reconcile the net fuel over-recovery balance as of December 31, 2018, which the Company filed on December 2, 2019 and which became effective on January 1, 2020. On March 31, 2020, the Company filed an application for approval of its amended 2019 Annual Renewable Plan and 2020 Annual Renewable Plan and for adjustment of its RPS Cost Rider for reconciliation of 2019 costs and revenue and to recover RPS costs for 2021. The Company cannot predict the outcome of this filing at this time.

Expedited Approval for CCN (Solar/Storage Project at New Mexico State University ("NMSU")). On November 20, 2019, the Company filed an application with the NMPRC requesting a ~~CCN for~~certificate of public convenience and necessity to construct, own and operate a ~~five-MW~~3-MW solar ~~power~~powered generation facility coupled with a 1-MW battery storage system to be located on ~~HAFB~~NMSU property in Arrowhead Park in the Company's service territory in New Mexico. The Company's application also seeks approval of a special retail rate contract between the Company and ~~HAFB negotiated~~NMSU to recover the costs of the new facility and its operations from NMSU. The new facility will be a ~~retail contract, which includes a power sales agreement for~~dedicated Company-owned resource serving NMSU. The Company has requested approval such that the ~~facility,~~project can begin construction in 2020 to ~~replace the existing load retention agreement that~~maximize potential tax benefits. This case was ~~approved by~~assigned NMPRC ~~final order issued October 5, 2016, in~~ Case No. ~~16-00224-UT.~~19-00350-UT. Hearings in this case currently are scheduled to begin June 4, 2020. The ~~solar generation facility began commercial operation on October 18, 2018.~~Company cannot predict the outcome of this filing at this time.

New Mexico Efficient Use of Energy Recovery ~~Factor.~~ On July 1, 2016, the Company filed its annual application with the NMPRC requesting approval of its 2017 Energy Efficiency and Load Management Plan and to establish the Efficient Use of Energy recovery factorFactor ("EUERF") 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 application 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. The Company’s EUERF was approved and effective in customer bills beginning on March 1, 2017. NMPRC rules authorize continuation of the energy efficiency programs and incentive approved in Case

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No. 16-00185-UT through 2018. The Company recorded approved incentives in operating revenues of $0.3 million and $0.7 million in 2018 and 2017, respectively, related to its 2015 through 2017 Energy Efficiency and Load Management Plans.

. On July 2, 2018, the Company filed its required application with the NMPRC for approval of its 2019-2021 Energy Efficiency and Load Management Plan and EUERF. The application ~~includes~~was assigned Case No. 18-00116-UT. On March 6, 2019, the NMPRC issued a ~~request for a~~final order approving: (i) the Company's 2019-2021 Energy Efficiency and Load Management Plan, with minor program modifications; (ii) the base incentive of 7.1% of program expenditures, or approximately $0.4 million annually for ~~2019-2021.~~2019-2021; and (iii) the continuation of the Company's EUERF. During 2019, the Company recorded incentives in operating revenues of $0.4 million related to its 2019 Energy Efficiency and Load Management Plan.

Newman Unit 6 CCN. On November 18, 2019, the Company filed an application with the NMPRC for a CCN to own and operate a new, approximately 228 MW, natural gas-fired unit to be constructed at Newman. The ~~application~~case was assigned NMPRC Case No. ~~18-00116-UT~~19-00349-UT. The proposed unit is called Newman Unit 6. The new unit was selected through a competitive bidding process and ~~hearings were held~~is needed to serve growth in customer demand, to replace older and less efficient generators that the Company plans to retire in the next several years, and to help the Company meet its planning reserve margin. In light of the current COVID-19 pandemic conditions, on ~~November 7, 2018, and November~~April 8, ~~2018.~~2020, the Hearing Examiner issued an order holding the procedural order in abeyance to reset procedural dates, including the public hearing. The Hearing Examiner subsequently issued a ~~Recommended Decision~~procedural order on ~~January 30, 2019,~~April 15, 2020, to reset the schedule and establish a ~~final order was adopted by~~new hearing date for July 20-24, 2020. The Company cannot predict the ~~NMPRC, with minor program modifications, on March 6, 2019.~~outcome of this case at this time.

~~Community Solar~~Long-Term Purchased Power Agreement ("LTPPA") Approval. On ~~April 24, 2018,~~November 18, 2019, the Company filed an application with the NMPRC to ~~initiate a community solar program in~~request prior approval for 3 LTPPAs pursuant to NMPRC Rule 17.9.551 of the New Mexico to include construction and ownership of a two-MW solar photovoltaic system located in Doña Ana County near the City of Las Cruces. Customer participation would have been on a voluntary basis, and customers would have contracted for a set capacity (kW) amount and would have received all energy produced by their subscribed capacity.Administrative Code ("Rule 551"). The ~~application~~case was assigned NMPRC Case No. ~~18-00099-UT~~19-00348-UT. The 3 LTPPAs provide for the purchase of energy and ~~was dismissed~~capacity from: (i) a 100 MW solar plant to be constructed in Santa Teresa, New Mexico; (ii) a 100 MW solar plant combined with a 50 MW of battery energy storage to be constructed in Otero County, New Mexico; and (iii) a 50 MW battery energy storage facility to be constructed in Canutillo, Texas. Rule 551 requires that no utility become irrevocably obligated under a LTPPA without ~~prejudice on October 31, 2018. The NMPRC set aside its October 31, 2018, order dismissing~~first obtaining the ~~application without prejudice, and on December 19, 2018,~~NMPRC’s written approval of the ~~NMPRC issued an Order Requiring El Paso Electric Company to Conduct Request for Proposals and to Amend Application; Order Extending Statutory Period and Appointing~~agreement. On April 22, 2020, the Hearing Examiner that would have required the Company to amend its initially-filed application on or before February 15, 2019. However, on January 10, 2019, the NMPRC with three new Commissioners reconsidered its prior order and dismissed the Community Solar application without prejudice. The case is now closed.

~~Integrated Resource Plan~~. On September 17, 2018, the Company filed its Integrated Resource Plan with the NMPRC for the period 2018-2037 ("2018 IRP") in Case No. 18-00293-UT as required by regulation and the Joint Stipulationissued a Recommended Decision in NMPRC Case No. ~~15-00241-UT, which was the Company's prior integrated resource plan filing. The triennial filing requires a public advisory process as part~~19-00348-UT recommending NMPRC approval of the ~~development~~solar plant and the combined solar plant and battery energy storage LTPPAs and disapproval of the ~~plan to identify a cost-effective portfolio of resources.~~battery energy storage LTPPA. The Company filed plan is subject to written public comments filed with the NMPRC to which the Company responded on October 29, 2018. NMPRC Staff filed a written report on November 16, 2018, recommending that the NMPRC return the 2018 IRPexceptions to the ~~Company with instructions for re-filing to correct 12 deficiencies identified by the~~Recommended Decision on April 29, 2020. The Recommended Decision is pending NMPRC Staff report. On December 5, 2018, the NMPRC issued an Order Partially Accepting Integrated Resource Plan; Order Requiring Refiling for Deficiencies. Pursuant to that order, on January 3, 2019, the Company filed an amended 2018 IRP. On January 10, 2019, in light of a pending motion for reconsideration, the NMPRC ordered its Staff to provide additional information and respond to issues raised regarding the filed 2018 IRP. On March 15, 2019, NMPRC Staff filed the additional response and recommended that the Company correct one deficiency identified. The Company is awaiting action by the NMPRC on the Staff recommendation.final order. The Company cannot predict the outcome of ~~the NMPRC's review of the plan or the outcome of~~ this case at this time.

COVID-19 Order. On March 19, 2020, the NMPRC issued an “Order Finding the Need for the Adoption and Issuance of ~~Long-Term Debt, Securities Financing, and Guarantee~~an Immediate Temporary Emergency Rule Prohibiting the Discontinuation of ~~Debt.~~ ~~On October 7, 2015, the Company received approval~~Residential Customers Utility Service” in NMPRC Case No. ~~15-00280-UT to guarantee~~20-00069-UT, adopting a temporary emergency rule prohibiting public utilities from discontinuing residential customer utility service during the issuance of up to $65.0 million of long-term debt by the Rio Grande Resources Trust II ("RGRT") to finance future purchases of nuclear fuel and to refinance existing nuclear fuel debt obligations, which remains effective. Under this authorization, on June 28, 2018, the RGRT issued $65.0 million in aggregate principal amount of 4.07% Senior Guaranteed Notes due August 15, 2025. On October 4, 2017, the Company received additional approval in NMPRC Case No. 17-00217-UT to amend and extend the Company's 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 ("PCBs") and the $37.1 million 2009 Series B 7.25% PCBs, which have optional redemptions beginning in 2019. The NMPRC approval to issue $350.0 million in long-term debt supersedes its prior approval. Under this authorization, on June 28, 2018, the Company issued $125.0 million in aggregate principal amountperiod of the ~~Company's 4.22% Senior Notes due August 15, 2028. Additionally, on September 13, 2018, the Company and the Bank of~~ New ~~York Mellon Trust Company, N.A., as trustee of the RGRT, entered into a $350.0 million third amended and restated credit agreement.~~

On January 30, 2019, the Company submitted an application with the NMPRC seeking approval to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. The application was assigned Case No. 19-00033-UT, and the NMPRC issued a final order approving the Company's request on March 27, 2019. Additionally, the Company is preparing for potential transactionsMexico Governor Lujan Grisham’s Emergency Executive Orders related to the ~~2009 Series A 7.25% PCBs and 2009 Series B 7.25% PCBs. On February 1, 2019, and April 1, 2019,~~COVID-19. Based on those orders, the ~~Company purchased~~NMPRC found that a Public Health Emergency is in ~~lieu~~effect based on findings of ~~redemption all~~an imminent peril to the ~~$63.5 million 2009 Series A 7.25% PCBs~~public health, safety or welfare and the ~~$37.1 million 2009 Series B 7.25% PCBs, respectively. The bonds were purchased utilizing funds borrowed under~~necessity for the ~~RCF. The Company is currently holding~~preservation of the ~~bonds and may remarket them~~public, health, safety or replace them with debt instruments of equivalent value at a future date depending on the Company's financing needs and market conditions. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for further discussion.

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~~Amendments~~The NMPRC order does not prohibit disconnection of a residential customer’s service during the time period during which the Emergency Executive Orders are in effect for emergency or safety reasons or upon customer request.

On April 27, 2020, the Company, New Mexico Gas Company, Public Service Company of New Mexico, and Southwestern Public Service Company filed a Joint Motion for Authorization for an Accounting Order to Allow Creation of a Regulatory Asset to Track Costs of Emergency Conditions. The joint motion seeks authority to create regulatory assets for uncollectible payment arrearages and incremental expenses incurred March 11, 2020 through December 31, 2020. On May 6, 2020, the NMPRC ordered that additional information is necessary before a final order can be issued on the joint motion. As such, utilities and interested parties are requested to address the additional issues noted in its order, as well as any additional issues they may identify, in the response to the ~~New Mexico Renewable Energy Act (“REA”).~~ The REA requires electric utilities to meet a renewable portfolio standard (“RPS”) of twenty percent of its total retail sales to New Mexico customers by 2020, reduced for sales to qualifying large non-governmental customers whose costs are capped under the REA (“Large Customer Adjustment”) and subject to a reasonable cost threshold (“RCT”) established by the NMPRC and currently set by the NMPRC at 3 percent of customers’ bills. Effective June 14, 2019, the New Mexico Energy Transition Act amends the REA (the “Amended REA”) to, among other amendments: (i) increase the RPS to forty percent by 2025, fifty percent by 2030, and eighty percent by 2040; (ii) impose a zero-carbon standard by 2045; (iii) eliminate the Large Customer Adjustment; (iv) set a statutory RCT; and (v) provide cost recovery for certain undepreciated investments and decommissioning costs (~~i.e.~~, coal-fired generation) associated with generation required by the NMPRC to be discontinued and replaced with lower or zero-carbon generation. In administering the eighty percent RPS and zero-carbon standards, the Amended REA requires by Commission to consider certain factors, including safety, reliability and rate impact to customers. The NMPRC has not docketed a rulemaking proceeding to implement the Amended REA. Under current NMPRC rules, the Company is required to file its next annual REA procurement plan case on May 1, 2019. On April 24, 2019, in NMPRC Case No. 19-00099-UT, the NMPRC granted the Company a variance authorizing the Company to file its next annual REA procurement plan case on October 1, 2019. The Company cannot predict the outcome of the filing at this time.joint motion.

Other Required Approvals. The Company has obtained other required approvals for tariffs and other approvals as required by the ~~New Mexico Public Utility Act~~NMPUA and the NMPRC.

Federal Regulatory Matters

Inquiry Regarding the Effect of the TCJA on Commission-Jurisdictional Rates and Order to Show Cause. On March 15, 2018, the FERC issued ~~two~~2 show cause orders under Section 206 of the Federal Power Act and Rule 209(a) of the FERC’s Rules of Practice and Procedure, directing 48 individual public utilities with stated transmission rates or transmission formula rates with a fixed line item of 35% for the federal income tax component to, within 60 days of the date of the orders, either ~~(1)~~(i) propose revisions to their transmission rates under their open access transmission tariffs or transmission owner tariffs on file with the FERC, or ~~(2)~~(ii) show cause why they should not be required to do so ("Show Cause Proceeding"). The Company was included in the list of public utilities impacted by the FERC orders. On May 14, 2018, the Company submitted its response, as required by the FERC order, which demonstrated that the reduced annual income tax does not cause the Company's total transmission revenues to become excessive and therefore no rate reduction was justified. Instead, the Company stated in its response that it will prepare for a future filing in which it will seek approval for revised Open Access Transmission Tariff ("OATT") rates that would include the recovery of an increased total transmission revenue requirement from OATT customers based on current circumstances and appropriate forward-looking adjustments. On November 15, 2018, the FERC issued an order finding that the Company had demonstrated that no rate reduction was justified and terminating the Show Cause Proceeding. The Company expects to file its request for approval to revise OATT rates in ~~the third quarter of 2019.~~2020.

Notice of Proposed Rulemaking ("NOPR")on Public Utility Transmission Changes to Address ~~Accumulated Deferred Income Taxes~~ADIT. On November 15, 2018, the FERC issued a ~~Notice of Proposed Rulemaking ("NOPR")~~NOPR that proposes to direct public utilities with transmission OATT rates, a transmission owner tariff or a rate schedule to determine the amount of excess or deficient ~~accumulated deferred income taxes~~ADIT caused by the TCJA’s reduction to the federal corporate income tax rate and return or recover this amount to or from customers. The NOPR has been assigned FERC Docket No. RM19-5-000. ~~The~~On November 21, 2019, the FERC issued a final rule, Order No. 864, which declined to adopt the proposals to require public utilities such as the Company ~~is currently evaluating~~with transmission stated rates to determine the ~~impact~~amount of excess or deficient ADIT caused by the TCJA's reduction to the federal corporate income tax and return or recover this ~~proposed rulemaking.~~

~~Issuance of Long-Term Debt, Securities Financing, and Guarantee of Debt.~~ amount to or from customers. Instead, the FERC determined that companies with transmission stated rates should address any excess or deficient ADIT caused by the TCJA in their next rate case. On ~~October 31, 2017,~~April 16, 2020, the FERC issued an order ~~in Docket~~on rehearing, Order 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, refinance, and/or replace the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs, which have optional redemptions beginning in 2019. The order also approved 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 864-A, affirming this decision.

FERC approvals. Under this authorization, on June 28, 2018, the Company issued $125.0 million in aggregate principal amount of the Company's 4.22% Senior Notes due August 15, 2028, and the RGRT issued $65.0 million in aggregate principal amount of its 4.07% Senior Guaranteed Notes due August 15, 2025. Also, on September 13, 2018, the Company and the Bank of New York Mellon Trust Company, N.A., as trustee of the RGRT, entered into a $350.0 million third amended and restated credit agreement. Additionally, the Company is preparing for potential transactions related to the 2009 Series A 7.25% PCBs and 2009 Series B 7.25% PCBs.Audit. On February 1, 2019, and April 1, 2019, the Company purchased in lieu of redemption all the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs, respectively. The bonds were purchased utilizing funds borrowed under the RCF. The Company is currently holding the bonds and may remarket them or replace

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them with debt instruments of equivalent value at a future date depending on the Company's financing needs and market conditions and in accordance with FERC action in response to the Company’s most recent FERC application (see below).

On January 30, 2019, the Company submitted an application with the FERC seeking approval to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. Included in the FERC application, the Company also requested various debt-related authorizations: approval to utilize the existing RCF for short-term borrowing not to exceed $400.0 million at any one time; to issue up to $225.0 million in new long-term debt; and to remarket the $63.5 million 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs in the form of replacement bonds or senior notes of equivalent value, not to exceed $100.6 million. On April 18,6, 2019, the FERC ~~issued~~notified the Company that it is commencing an ~~order authorizing~~audit that is intended to evaluate the ~~issuances through April 18, 2021. See Part I, Item~~Company’s compliance with: (i) the approved terms, conditions, and rates of its OATT; (ii) the accounting requirements of the Uniform System of Accounts; (iii) the reporting requirements of the FERC Form No. 1 Annual Report and Supplemental Form 3-Q Quarterly Financial ~~Statements, Note M~~Reports; and (iv) the regulations regarding Open Access Same-time Information Systems. The audit covers the period January 1, 2016 to the present and was assigned FERC Docket No. PA19-3-000. The Company cannot predict the outcome or findings, if any, of ~~Notes to Financial Statements for further discussion.~~the FERC audit at this time.

Other Required Approvals. The Company has obtained required approvals for rates, tariffs and other approvals as required by the Federal Power Act and the FERC.

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E. Palo Verde Generating Station ("Palo Verde")

Spent Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in 1987, 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 with each nuclear power plant. The DOE failed to begin accepting spent nuclear fuel by 1998. ~~Pursuant to the terms of the August 18, 2014 settlement agreement, and as amended with the DOE,~~On December 19, 2012, Arizona Public Service Company ("APS") ~~files annual claims for the period July 1 of the then-previous year to June 30 of the then-current year~~, acting on behalf of itself and those utilities that share in power and energy entitlements, and bear certain allocated costs, with respect to Palo Verde pursuant to the Arizona Nuclear Power Project Participation Agreement dated August 23, 1973, as amended ~~("ANPP Participation Agreement"~~(the "Palo Verde Participants")., filed a second breach of contract lawsuit against the DOE. This lawsuit sought to recover damages incurred due to the DOE’s failure to accept Palo Verde’s spent nuclear fuel for the period beginning January 1, 2007 through June 30, 2011. Pursuant to the terms of the August 18, 2014 settlement agreement, and as amended with the DOE, APS files annual claims for the period July 1 of the then-previous year to June 30 of the then-current year on behalf of itself and the Palo Verde Participants. The settlement agreement, as amended, provides APS with a method for submitting claims and receiving recovery for costs incurred through December 31, 2016, which has been extended to December 31, 2019.

Currently, the DOE is reviewing a possible three year extension of the settlement agreement. The Company cannot predict the timing of the DOE’s decision on the extension.

On October 31, ~~2018,~~2019, APS filed a ~~$10.2~~$16.0 million claim for the period July 1, ~~2017~~2018 through June 30, ~~2018. The Company's~~2019. In February 2020, the DOE approved this claim. On April 20, 2020, the Company received approximately $2.4 million, representing its share of ~~this claim is approximately $1.6 million. The DOE approved~~ the ~~claim on April 10, 2019. Any reimbursement is anticipated to be received in the second quarter~~award, of ~~2019, and the majority of the reimbursement received by the Company is expected to be~~which $0.9 million was credited to customers through the applicable fuel adjustment clauses.

Palo Verde Operations and Maintenance Expense. Included in "Operations and maintenance" in the Company's Statements of Operations are expenses associated with Palo Verde as follows (in thousands):



	2020		2019
Three months ended March 31,	$	19,613	$	21,344
Twelve months ended March 31,	93,794		95,623

2019 2018
Three months ended March 31, $ 21,344
$ 22,175
Twelve months ended March 31, 95,623
99,931

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

F. Common Stock

Dividends. The Company paid $15.7 million and $14.7 million ~~and~~ ~~$13.6 million~~ in quarterly cash dividends during the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. The Company paid a total of ~~$58.6~~$62.7 million and ~~$54.3~~$58.6 million in quarterly cash dividends during the twelve months ended March 31, 2020 and 2019, respectively.

Under the Merger Agreement, the Company is not allowed to declare or pay dividends or distributions on shares of common stock in an amount in excess of $0.385 per share for quarterly dividends declared before June 1, 2020 and ~~2018, respectively.~~$0.41 per share for quarterly dividends declared on or after June 1, 2020. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for further discussion.



Basic and Diluted Earnings Per Share. The basic and diluted earnings per share are presented below (in thousands except for share data):
	Three Months Ended March 31,						Twelve Months Ended March 31,
	2020			2019			2020			2019
Weighted average number of common shares outstanding:
Basic number of common shares outstanding	40,653,326			40,582,936			40,623,151			40,543,986
Dilutive effect of unvested performance awards	—			80,817			68,810			117,242
Diluted number of common shares outstanding	40,653,326			40,663,753			40,691,961			40,661,228
Basic net income (loss) per common share:
Net income (loss)	$	(35,209	)	$	6,089		$	81,739		$	97,370
Income allocated to participating restricted stock	(43		)	(47		)	(250		)	(340		)
Net income (loss) available to common shareholders	$	(35,252	)	$	6,042		$	81,489		$	97,030
Diluted net income (loss) per common share:
Net income (loss)	$	(35,209	)	$	6,089		$	81,739		$	97,370
Income reallocated to participating restricted stock	(43		)	(47		)	(250		)	(339		)
Net income (loss) available to common shareholders	$	(35,252	)	$	6,042		$	81,489		$	97,031
Basic net income (loss) per common share:
Distributed earnings	$	0.385		$	0.36		$	1.54		$	1.44
Undistributed earnings (losses)	(1.255		)	(0.21		)	0.47			0.95
Basic net income (loss) per common share	$	(0.870	)	$	0.15		$	2.01		$	2.39
Diluted net income (loss) per common share:
Distributed earnings	$	0.385		$	0.36		$	1.54		$	1.44
Undistributed earnings (losses)	(1.255		)	(0.21		)	0.46			0.95
Diluted net income (loss) per common share	$	(0.870	)	$	0.15		$	2.00		$	2.39

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Basic and Diluted Earnings Per Share. The basic and diluted earnings per share are presented below (in thousands except for share data):
Three Months Ended March 31, Twelve Months Ended March 31,
2019 2018 2019 2018
Weighted average number of common shares outstanding:
Basic number of common shares outstanding 40,582,936
40,491,194
40,543,986
40,440,189
Dilutive effect of unvested performance awards 80,817
—
117,242
123,436
Diluted number of common shares outstanding 40,663,753
40,491,194
40,661,228
40,563,625
Basic net income (loss) per common share:
Net income (loss) $ 6,089
$ (6,966 ) $ 97,370
$ 95,285
Income allocated to participating restricted stock (47 ) (48 ) (340 ) (353 )
Net income (loss) available to common shareholders $ 6,042
$ (7,014 ) $ 97,030
$ 94,932
Diluted net income (loss) per common share:
Net income (loss) $ 6,089
$ (6,966 ) $ 97,370
$ 95,285
Income reallocated to participating restricted stock (47 ) (48 ) (339 ) (353 )
Net income (loss) available to common shareholders $ 6,042
$ (7,014 ) $ 97,031
$ 94,932
Basic net income (loss) per common share:
Distributed earnings $ 0.36
$ 0.335
$ 1.44
$ 1.34
Undistributed earnings (losses) (0.21 ) (0.505 ) 0.95
1.01
Basic net income (loss) per common share $ 0.15
$ (0.170 ) $ 2.39
$ 2.35
Diluted net income (loss) per common share:
Distributed earnings $ 0.36
$ 0.335
$ 1.44
$ 1.34
Undistributed earnings (losses) (0.21 ) (0.505 ) 0.95
1.00
Diluted net income (loss) per common share $ 0.15
$ (0.170 ) $ 2.39
$ 2.34



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		Twelve Months Ended
	March 31,		March 31,
	2020	2019	2020	2019
Restricted stock awards	53,100	62,605	49,270	60,432
Performance shares (a)	—	43,652	—	22,234

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 Twelve Months Ended
March 31, March 31,
2019 2018 2019 2018
Restricted stock awards 62,605
72,218
60,432
66,288
Performance shares (a) 43,652
45,977
22,234
11,494

________________________


(a)	Certain performance shares were excluded from the computation of diluted earnings per share as no0 payouts would have been required based upon performance at the end of each corresponding period.

~~Table of Contents~~

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Authorization to Issue Shares~~

On January 30, 2019, the Company submitted an application with both the NMPRC and the FERC seeking approval to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. The Company received final approvals from the NMPRC and the FERC on March 27, 2019 and April 18, 2019, respectively.

G. Income Taxes

The Company files income tax returns in the 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, Texas, Arizona and New Mexico jurisdictions for years prior to ~~2014.~~2015.

For the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the Company’s effective tax rate was ~~23.8%~~23.2% and ~~30.5%~~23.8%, respectively. For the twelve months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the Company's effective tax rate was ~~24.3%~~20.8% and ~~34.5%~~24.3%, respectively. ~~The federal statutory tax rate is 21% in 2019 and in 2018, and 35.0% in 2017.~~ The Company's effective tax rate for ~~the three months ended March 31,~~all periods in 2020 and 2019 ~~differs~~differ from the ~~Company's effective~~federal statutory tax rate ~~for the three months ended March 31, 2018~~ due to ~~lower values~~state income taxes, capital gains in the decommissioning trusts which are taxed at the federal rate of 20%, the tax benefit of stock incentives vested and other permanent differences. The Company's effective tax rate for the twelve months ended March 31, 2019 differs from the Company's effective tax rate for the twelve months ended March 31, 2018 due to the change in the federal income tax rate partially offset by an increase in stateincentive plans, tax reserves and other permanent differences.

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

H. Commitments, Contingencies and Uncertainties

For a full discussion of commitments and contingencies, see Part II, Item 8, Financial Statements and Supplementary Data, Note LM of the Notes to Financial Statements in the ~~2018~~2019 Form 10-K. In addition, see Part I, Item 1, Financial Statements, Notes D and E of Notes to Financial Statements above and Part II, Item 8, Financial Statements and Supplementary Data, Notes D and F of the Notes to Financial Statements in the ~~2018~~2019 Form 10-K regarding matters related to wholesale power sales contracts and transmission contracts subject to regulation and Palo Verde, including decommissioning, spent nuclear fuel and waste disposal, and liability and insurance matters.

Power Purchase and Sale Contracts

To supplement its own generation and operating reserve requirements and to meet its RPS requirements, the Company engages in power purchase arrangements that may vary in duration and amount based on an evaluation of the Company's resource needs, the economics of the transactions and specific RPS requirements. See Part I, Item 1, Financial Statements, Note D of Notes to Financial Statements for further discussion. For a discussion of power purchase and sale contracts that the Company has entered into with various counterparties, see Part II, Item 8, Financial Statements and Supplementary Data, Note LM of the Notes to Financial Statements in the ~~2018~~2019 Form 10-K.

Environmental Matters

~~General.~~The Company is subject to extensive laws, regulations and permit requirements with respect to air and greenhouse gas emissions, water discharges, soil and water quality, waste management and disposal, natural resources and other environmental matters by federal, state, regional, tribal and local authorities. Failure to comply with such laws, regulations and requirements can result in actions by authorities or other third parties that might seek to impose on the Company administrative, civil and/or criminal penalties or other sanctions. In addition, releases of pollutants or contaminants into the environment can result in costly cleanup liabilities. These laws, regulations and requirements are subject to change through modification or reinterpretation, or the introduction of new laws and regulations and, as a result, the Company may face additional capital and operating costs to comply.

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

I. ~~Leases~~

The Company’s lease population is composed of operating leases. The Company leases land in El Paso, Texas, adjacent to Newman under a lease that expires in June 2033 with a renewal option of 25 years. The Company also has several other leases for offices, parking facilities and equipment that expire within the next 5 years. The Company has transmission and distribution lines that are operated under various land rights agreements, including easements, leases, permits and franchises. The components of lease expense are as follows:

Three Months Ended March 31, 2019
Lease cost (in thousands):
Operating lease cost $ 253
Short-term lease cost 274
Variable lease cost 34
Total lease cost $ 561

~~Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):~~

March 31, 2019
Operating leases:
Operating lease ROU assets (included in electric plant in service) $ 6,217

Operating lease liabilities (current included in other current liabilities) 552
Operating lease liabilities (net of current included in deferred credits and other liabilities) 5,336
Total lease liabilities $ 5,888

Weighted average remaining lease terms (in years) 12.22
Weighted average discount rate 4.63 %

~~Supplemental cash flow information related to leases was as follows (in thousands):~~

Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases $ 557

~~ROU assets obtained in exchange for lease obligations (in thousands):~~

Three Months Ended March 31, 2019
Operating leases $ 6,217

~~Table of Contents~~

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Maturities of operating lease liabilities at March 31, 2019 were as follows (in thousands):~~

Year ending December 31,
2019 $ 306
2020 770
2021 696
2022 639
2023 590
Thereafter 4,829
Total lease payments 7,830
Less imputed interest (1,942 )
Total $ 5,888

~~Disclosures related to periods prior to adoption of the new lease standard~~

The Company’s total rental expense related to operating leases was $1.7 million and $2.4 million for the twelve months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, the Company’s minimum future rental payments for the next five years were as follows (in thousands):

Year ending December 31,
2019 $ 923
2020 820
2021 700
2022 544
2023 526

J. 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 Part I, Item 1, Financial Statements, Notes D and H of Notes to Financial Statements above and Part II, Item 8, Financial Statements and Supplementary Data, Notes D and LM of ~~the~~ Notes to Financial Statements in the ~~2018~~2019 Form 10-K for further discussion of the effects of government legislation and regulation on the ~~Company.~~Company as well as certain pending legal proceedings.

Litigation Related to the Merger. NaN purported Company shareholders filed lawsuits under the federal securities laws, two in the U.S. District Court for the Southern District of New York and one in the U.S. District Court for the District of Delaware, challenging the adequacy of the disclosures made in the Company’s preliminary proxy statement in connection with the Merger. These cases are captioned Stein v. El Paso Electric Company., et al., Case No. 1:19-cv-06703 (the “Stein Action”), Rosenblatt v. El Paso Electric Company., et al., Case No. 1:19-cv-01367-UNA (the “Rosenblatt Action”), and Gorski v. El Paso Electric Company., et. al., Case No. 1:19-cv-07211 (the “Gorski Action”), respectively.The Stein Action, filed on July 18, 2019, the Rosenblatt Action, filed on July 23, 2019, and the Gorski Action, filed on August 1, 2019, were asserted on behalf of putative classes of Company shareholders. The Rosenblatt Action was voluntarily dismissed on January 29, 2020; the Stein Action was dismissed for want of prosecution on March 6, 2020; and the plaintiff in the Gorski Action has informed the court of his intention to dismiss the case and seek a mooting fee.

~~Table~~All 3 actions alleged violations of ~~Contents~~Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-9 promulgated thereunder based on various alleged omissions of material information from the preliminary proxy statement. The Stein Action named as defendants the Company and each of our directors, individually, and sought to enjoin the Merger (or, in the alternative, rescission or an award of rescissory damages in the event the Merger is completed), damages, and an award of costs and attorneys’ and expert fees. The Rosenblatt Action named as defendants the Company and each of our directors, individually, and sought to enjoin the Merger (or, in the alternative, rescission or an award of rescissory damages in the event the Merger is completed), to compel our directors to issue a revised proxy statement, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and an award of costs and attorneys’ and expert fees. The Gorski Action also named as defendants the Company and each of our directors, individually, and sought to enjoin the Merger (or, in the alternative, rescission or an award of rescissory damages in the event the Merger is completed), to compel our directors to issue a revised proxy statement, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and an award of costs and attorneys’ and expert fees.

The Company believes that these complaints are without merit, and while the Company believes that the disclosures set forth in the proxy statement complied fully with applicable law, to moot plaintiffs’ disclosure claims, to avoid nuisance, potential expense and delay, and to provide additional information to the Company’s shareholders, the Company voluntarily supplemented the proxy statement with additional disclosure in a Current Report on Form 8-K filed by the Company with the SEC on September 9, 2019. As mentioned above, both the Rosenblatt Action and the Stein Action have been dismissed. While the final outcome of the Gorski Action cannot be predicted with certainty, based upon the plaintiff's statement to the court of his intention to dismiss the case and a review of applicable insurance coverage, the Company does not believe that the Gorski Action 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.

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

K.J. Employee Benefits

The expected return on plan assets is included in "Investment and interest income, net" in the Company's Statements of Operations. The amortization of prior service benefit and amortization of gains are included in "Miscellaneous non-operating income". The amortization of prior service cost and amortization of losses are included in "Miscellaneous non-operating deductions". The interest cost component of net periodic benefit cost is included in "Other interest".

Retirement Plans

The net periodic benefit cost recognized for the three and twelve months ended March 31, ~~2019~~2020 and ~~2018,~~2019, is made up of the components listed below as determined using the projected unit credit actuarial cost method (in thousands):



	Three Months Ended						Twelve Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Components of net periodic benefit cost:
Service cost	$	3,157		$	2,488		$	10,575		$	10,818
Interest cost	3,095			3,608			13,941			13,263
Expected return on plan assets	(5,691		)	(5,383		)	(21,800		)	(21,144		)
Amortization of:
Net loss	2,281			1,418			6,655			7,871
Prior service benefit	(877		)	(878		)	(3,505		)	(3,506		)
Net periodic benefit cost	$	1,965		$	1,253		$	5,866		$	7,302

Three Months Ended Twelve Months Ended
March 31, March 31,
2019 2018 2019 2018
Components of net periodic benefit cost:
Service cost $ 2,488
$ 2,758
$ 10,818
$ 9,006
Interest cost 3,608
3,223
13,263
13,034
Expected return on plan assets (5,383 ) (5,315 ) (21,144 ) (19,696 )
Amortization of:
Net loss 1,418
2,100
7,871
8,465
Prior service benefit (878 ) (878 ) (3,506 ) (3,506 )
Net periodic benefit cost $ 1,253
$ 1,888
$ 7,302
$ 7,303

During the three months endedMarch 31, ~~2019~~2020, the Company contributed $~~3.0~~2.9 million of its projected $~~9.5~~9.3 million~~2019~~2020 annual contribution to its retirement plans.

Other Postretirement Benefits

The net periodic benefit recognized for the three and twelve months endedMarch 31, ~~2019~~2020 and ~~2018,~~2019, is made up of the components listed below (in thousands):



	Three Months Ended						Twelve Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Components of net periodic benefit:
Service cost	$	801		$	625		$	2,599		$	2,720
Interest cost	489			618			2,327			2,305
Expected return on plan assets	(612		)	(530		)	(2,202		)	(2,352		)
Amortization of:
Prior service benefit	(774		)	(1,308		)	(4,700		)	(5,921		)
Net gain	(836		)	(575		)	(2,638		)	(2,216		)
Net periodic benefit	$	(932	)	$	(1,170	)	$	(4,614	)	$	(5,464	)

Three Months Ended Twelve Months Ended
March 31, March 31,
2019 2018 2019 2018
Components of net periodic benefit:
Service cost $ 625
$ 700
$ 2,720
$ 2,348
Interest cost 618
565
2,305
2,610
Expected return on plan assets (530 ) (613 ) (2,352 ) (2,050 )
Amortization of:
Prior service benefit (1,308 ) (1,538 ) (5,921 ) (6,151 )
Net gain (575 ) (525 ) (2,216 ) (1,808 )
Net periodic benefit $ (1,170 ) $ (1,411 ) $ (5,464 ) $ (5,051 )

During the three months ended March 31, ~~2019,~~2020, the Company contributed $0.2 million of its projected ~~$0.5~~$0.6 million ~~2019~~2020 annual contribution to its other postretirement benefits plan.

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

L.K. 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, ~~(including restricted cash),~~ investment in debt securities, accounts receivable, decommissioning trust funds, long-term debt, short-term borrowings under the ~~RCF,~~revolving credit facility ("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.

Long-Term Debt and Short-Term Borrowings Under the RCF. The fair values of the Company's long-term debt and short-term borrowings under the RCF are based on estimated market prices for similar issues and are presented below (in thousands):


	March 31, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Pollution Control Bonds ~~(1)~~	$	95,088	$	98,217	$	157,769	$	161,917	$	157,982	$	163,903	$	157,965	$	167,256
Senior Notes	1,118,036		1,283,200		1,117,943		1,244,310		1,118,487		1,320,125		1,118,371		1,398,645
RGRT Senior Notes ~~(2)~~(1)	109,537		112,850		109,507		111,440		109,641		111,570		109,614		114,270
RCF ~~(2)~~(1)	202,951		202,951		49,207		49,207		240,781		240,780		113,801		113,801
Total	$	1,525,612	$	1,697,218	$	1,434,426	$	1,566,874	$	1,626,891	$	1,836,378	$	1,499,751	$	1,793,972

_______________

(1)

On February 1, 2019, the Company purchased in lieu of redemption all of the 2009 Series A 7.25% PCBs with a principal amount of $63.5 million, utilizing funds borrowed under the RCF. The Company is currently holding the 2009 Series A 7.25% PCBs and may remarket them or replace them with debt instruments of equivalent value at a future date depending on the Company's financing needs and market conditions, and in accordance with the Company's regulators' approvals. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for further discussion.

~~(2)~~

Nuclear fuel financing, as of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, is funded through $110 million ~~RGRT~~Rio Grande Resources Trust II ("RGRT") Senior Notes and ~~$30.0~~$33.8 million and ~~$26.2~~$29.8 million, respectively, under the RCF. As of March 31, ~~2019, $173.0 million was outstanding under the RCF for working capital~~2020 and ~~general corporate purposes. As of~~ December 31, ~~2018, $23.0~~2019, $207.0 million and $84.0 million, was outstanding under the RCF for working capital or general corporate ~~purposes.~~purposes, respectively. The interest rate on the Company's borrowings under the RCF is reset throughout the quarter reflecting current market rates. Consequently, the carrying value approximates fair value.

Marketable Securities. The Company's marketable securities, included in decommissioning trust funds in the balance sheets, are reported at fair value which was ~~$298.3~~$294.5 million and ~~$276.9~~$326.0 million at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The market losses experienced by the Company were in line with declines reported in the financial markets worldwide.

The investments in the Company's Palo Verde nuclear decommissioning trust funds ("NDT") are classified as ~~available for sale debt securities,~~ equity securities and temporary cash and cash equivalents restricted solely for investment in the NDT. These investments are recorded at their estimated fair value in accordance with FASB guidance for certain investments in ~~debt and~~ equity securities. On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall, which eliminates the requirements to classify investments in equity securities with readily determinable fair values as trading or available for sale and requires entities to recognize changes in fair value for these securities in net income as reported in the Company's Statements of Operations. ASU 2016-01 requires a modified-retrospective approach and therefore, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

During September 2019, the Company sold all of the fixed income securities classified as available for sale held in the NDT which approximated 450 individual securities. The proceeds were reinvested in three exchange traded funds that hold similar securities. The exchange traded funds meet the definition of equity securities with readily determinable fair values and therefore are not classified as available for sale as of September 30, 2019.

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

The reported fair values include gross unrealized losses on securities classified as available for sale whose impairment the Company has deemed to be temporary. The tables below present the gross unrealized losses and the fair value of these securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

March 31, 2019
Less than 12 Months 12 Months or Longer Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value
Unrealized Losses
Description of Securities (1):

Federal Agency Mortgage Backed Securities $ 694
$ (20 ) $ 13,210
$ (271 ) $ 13,904
$ (291 )
U.S. Government Bonds 4,722
(6 ) 26,267
(1,194 ) 30,989
(1,200 )
Municipal Debt Obligations 4,480
(332 ) 1,614
(127 ) 6,094
(459 )
Corporate Debt Obligations 6,851
(114 ) 11,170
(299 ) 18,021
(413 )
Total $ 16,747
$ (472 ) $ 52,261
$ (1,891 ) $ 69,008
$ (2,363 )

~~_________________~~


~~(1)~~	~~Includes~~ 96 ~~securities.~~

December 31, 2018
Less than 12 Months 12 Months or Longer Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
Description of Securities (2):

Federal Agency Mortgage Backed Securities $ 6,187
$ (36 ) $ 14,567
$ (510 ) $ 20,754
$ (546 )
U.S. Government Bonds 4,005
(9 ) 36,615
(1,663 ) 40,620
(1,672 )
Municipal Debt Obligations 3,100
(74 ) 9,037
(723 ) 12,137
(797 )
Corporate Debt Obligations 22,259
(763 ) 11,231
(731 ) 33,490
(1,494 )
Total $ 35,551
$ (882 ) $ 71,450
$ (3,627 ) $ 107,001
$ (4,509 )

~~_________________~~


~~(2)~~	~~Includes~~ ~~156~~ ~~securities.~~

The Company monitors the length of time specific securities trade below their cost basis along with the amount and percentage of the unrealized loss in determining if a decline in fair value below recorded cost of debt securities classified as available for sale is considered to be other than temporary. The Company recognizes impairment losses on certain of its available for sale debt securities deemed to be other than temporary. In accordance with the FASB guidance, these impairment losses are recognized in net income, and a lower cost basis is established for these securities. In addition, the Company will research the future prospects of individual securities as necessary. The Company does not anticipate expending monies held in trust before 2044 or a later period when decommissioning of Palo Verde begins. For the three and twelve months ended March 31, 2019 and 2018, the Company did not recognize any other than temporary impairment losses on its available-for-sale securities.

~~Table of Contents~~

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Investments categorized as available for sale securities also include gross unrealized gains which have not been recognized in the Company's net income. The table below presents the unrecognized gross unrealized gains and the fair value of these securities, aggregated by investment category (in thousands):

March 31, 2019 December 31, 2018

Fair
Value

Unrealized
Gains

Fair
Value

Unrealized
Gains
Description of Securities:
Federal Agency Mortgage Backed Securities $ 16,459
$ 327
$ 9,959
$ 176
U.S. Government Bonds 18,413
419
6,987
149
Municipal Debt Obligations 3,454
189
1,952
120
Corporate Debt Obligations 29,648
888
8,283
222
Total Debt Securities $ 67,974
$ 1,823
$ 27,181
$ 667

The Company's marketable securities include investments in mortgage backed securities, municipal, corporate and federal debt obligations. The contractual year of maturity for these available-for-sale debt securities as of March 31, 2019, is as follows (in thousands):

Total 2019 2020
through
2023 2024 through 2028 2029 and Beyond
Federal Agency Mortgage Backed Securities $ 30,363
$ —
$ 19
$ 514
$ 29,830
U.S. Government Bonds 49,402
2,356
20,491
21,282
5,273
Municipal Debt Obligations 9,548
649
3,446
3,566
1,887
Corporate Debt Obligations 47,669
940
21,968
11,488
13,273
Total Available for Sale Debt Securities $ 136,982
$ 3,945
$ 45,924
$ 36,850
$ 50,263

The Company's available for sale securities in the NDT ~~are~~were sold from time to time and the Company ~~uses~~used the specific identification basis to determine the amount to reclassify from ~~AOCI~~accumulated other comprehensive income into net income. The proceeds from the sale of these securities during the three and twelve months ended March 31, ~~2019~~2020 and ~~2018,~~2019, and the related effects on pre-tax income are as follows (in thousands):



	Three Months Ended					Twelve Months Ended
	March 31,					March 31,
	2020		2019			2020			2019
Proceeds from sales or maturities of available for sale securities	$	—	$	15,771		$	152,406		$	29,969
Gross realized gains included in pre-tax income	—		$	58		$	4,757		$	66
Gross realized losses included in pre-tax income	—		(887		)	(1,696		)	(1,822		)
Net gains (losses) included in pre-tax income	$	—	$	(829	)	$	3,061		$	(1,756	)

Three Months Ended Twelve Months Ended
March 31, March 31,
2019 2018 2019 2018
Proceeds from sales or maturities of available-for-sale securities $ 15,771
$ 11,757
$ 29,969
$ 82,739
Gross realized gains included in pre-tax income $ 58
$ 9
$ 66
$ 9,195
Gross realized losses included in pre-tax income (887 ) (527 ) (1,822 ) (1,278 )
Net gains (losses) included in pre-tax income $ (829 ) $ (518 ) $ (1,756 ) $ 7,917

~~Table of Contents~~

~~EL PASO ELECTRIC COMPANY~~

~~NOTES TO FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Upon the adoption of ASU 2016-01, Financial Instruments - Overall, on January 1, 2018, the Company records, on a modified-retrospective basis, changes in fair market value for equity securities held in the NDT in the Company's Statements of Operations. The unrealized gains and losses recognized during the three and twelve months ended March 31, ~~2019~~2020 and ~~2018,~~2019, and related effects on pre-tax income are as follows (in thousands):



	Three Months Ended					Twelve Months Ended
	March 31,					March 31,
	2020			2019		2020			2019

Net gains (losses) recognized on equity securities	$	(33,164	)	$	16,818	$	(13,700	)	$	7,287
Less: Net gains recognized on equity securities sold	24			128		326			5,417
Unrealized gains (losses) recognized on equity securities still held at reporting date	$	(33,188	)	$	16,690	$	(14,026	)	$	1,870

Three Months Ended
March 31,
2019 2018

Net gains and (losses) recognized on equity securities $ 16,818
$ (1,991 )
Less: Net gains recognized on equity securities sold 128
1,790
Unrealized gains and (losses) recognized on equity securities still held at reporting date $ 16,690
$ (3,781 )

Fair Value Measurements. The FASB guidance requires the Company to provide expanded quantitative disclosures for financial assets and liabilities recorded on the balance sheet at fair value. Financial assets carried at fair value include the Company's decommissioning trust investments and investments in debt securities which are included in deferred charges and other assets on the Company's Balance Sheets. The Company has no liabilities that are measured at fair value on a recurring basis. The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 – Observable inputs that reflect quoted market prices for identical assets and liabilities in active markets. Financial assets utilizing Level 1 inputs include the NDT investments in active exchange-traded equity securities, mutual funds and U.S. Treasury securities that are in a highly liquid and active market. The Institutional Funds - International Equity investments are valued using the Net Asset Value ("NAV") provided by the administrator of the fund. The NAV price is quoted on a restrictive market although the underlying investments are traded on active markets. The NAV used for determining the fair value of the Institutional ~~Funds-International~~Funds - International Equity investments have readily determinable fair values. Accordingly, such fund values are categorized as Level 1.

Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability either directly or indirectly. ~~Financial~~The Company does not hold any financial assets utilizing Level 2 inputs ~~include~~in the ~~NDT investments~~NDT. Investments in fixed income ~~securities.~~securities were sold by the Company on September 30, 2019, and reinvested in similar fixed income securities held in three exchange traded funds. The fair value of these financial instruments is based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, adjusted for observable differences.

Level 3 – Unobservable inputs using data that is not corroborated by market data and primarily based on internal Company analysis using models and various other analysis. Financial assets utilizing Level 3 inputs are the Company's investment in debt securities.

The securities in the NDT are valued using prices and other relevant information generated by market transactions involving identical or comparable securities. The FASB guidance identifies this valuation technique as the "market approach" with observable inputs. The Company analyzes available-for-sale securities to determine if losses are other than temporary.

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

The fair value of the NDT and investments in debt securities at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, and the level within the three levels of the fair value hierarchy defined by the FASB guidance are presented in the table below (in thousands):


Description of Securities	Fair Value as of March 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value as of March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	1,632	$	—	$	—	$	1,632	$	1,565	$	—	$	—	$	1,565
Equity Securities:
Domestic(a)	$	127,450	$	127,450	$	—	$	—	$	270,522	$	270,522	$	—	$	—
International	26,751		26,751		—		—		21,938		21,938		—		—
Total Equity Securities	154,201		154,201		—		—		292,460		292,460		—		—
Available for Sale Debt Securities:
Federal Agency Mortgage Backed Securities	30,363		—		30,363		—
U.S. Government Bonds	49,402		49,402		—		—
Municipal Debt Obligations	9,548		—		9,548		—
Corporate Debt Obligations	47,669		—		47,669		—
Total Available for Sale Debt Securities	136,982		49,402		87,580		—
Cash and Cash Equivalents	7,155		7,155		—		—		2,041		2,041		—		—
Total	$	298,338	$	210,758	$	87,580	$	—	$	294,501	$	294,501	$	—	$	—



Description of Securities	Fair Value as of December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	1,587	$	—	$	—	$	1,587
Equity Securities:
Domestic (a)	$	295,065	$	295,065	$	—	$	—
International	29,202		29,202		—		—
Total Equity Securities	324,267		324,267		—		—
Cash and Cash Equivalents	1,731		1,731		—		—
Total	$	325,998	$	325,998	$	—	$	—

Description of Securities Fair Value as of December 31, 2018
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Trading Securities:
Investments in Debt Securities $ 1,656
$ —
$ —
$ 1,656
Equity Securities:
Domestic $ 111,325
$ 111,325
$ —
$ —
International 24,540
24,540
—
—
Total Equity Securities 135,865
135,865
—
—
Available for Sale Debt Securities:
Federal Agency Mortgage Backed Securities 30,713
—
30,713
—
U.S. Government Bonds 47,607
47,607
—
—
Municipal Debt Obligations 14,089
—
14,089
—
Corporate Debt Obligations 41,773
—
41,773
—
Total Available for Sale Debt Securities 134,182
47,607
86,575
—
Cash and Cash Equivalents 6,858
6,858
—
—
Total $ 276,905
$ 190,330
$ 86,575
$ —
_________________


(a)	Includes $151.9 million and $148.1 million, as of March 31, 2020 and December 31, 2019, respectively, held in exchange traded funds with underlying investments in debt securities that meet the definition of equity securities with readily determinable fair values.

~~There were no transfers in or out of Level 1 and Level 2 fair value measurements categories due to changes in observable inputs during the three and twelve months ended March 31, 2019 and 2018.~~ There were no purchases, sales, issuances and settlements related to the assets in the Level 3 fair value measurement category during the three ~~and twelve~~ months ended March 31, ~~2019~~2020 and ~~2018.~~2019.

~~Table of Contents~~

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

M.L. Long-Term Debt and Financing Obligations

~~Pollution Control Bonds.~~Revolving Credit Facility. The Company ~~had three series~~has an RCF for working capital and general corporate purposes and financing nuclear fuel through the RGRT. On March 20, 2020, the Company exercised its option to extend the maturity of ~~tax-exempt unsecured PCBs~~the RCF by one year to September 13, 2024 and to increase the borrowing commitments under the RCF by $50.0 million to $400.0 million. The Company has the option to extend the facility by 1 additional year to September 2025 upon the satisfaction of certain conditions set forth in ~~aggregate principal amount~~the RCF agreement, including requisite lender approval.

Under the Merger Agreement, subject to certain exceptions, the Company cannot incur additional indebtedness over $200.0 million (excluding borrowings up to the existing borrowing capacity of ~~$159.8 million~~the RCF), without the prior written consent of Parent.

M. Agreement and Plan of Merger

On June 1, 2019, the Company entered into the Merger Agreement, by and among the Company, Parent and Merger Sub. Pursuant to the Merger Agreement, on and subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation in the Merger and becoming a wholly owned subsidiary of ~~December 31, 2018. The 2009 Series A 7.25% PCBs~~Parent. Parent and Merger Sub are affiliates of IIF.

On and subject to the ~~2009 Series B 7.25% PCBs with an aggregate principal amount, together,~~terms and conditions set forth in the Merger Agreement, upon the closing of ~~$100.6 million had optional redemptions beginning~~the Merger, each share of common stock including outstanding and unvested restricted stock and unvested performance stock of the Company shall be cancelled and converted into the right to receive $68.25 in ~~February 2019 and April 2019, respectively.~~cash, without interest (the "Merger Consideration").

The Company, ~~purchased~~Parent and Merger Sub each have made various representations, warranties and covenants in ~~lieu~~the Merger Agreement. Among other things, the Company has agreed, subject to certain exceptions, to conduct its business in the ordinary course, consistent with past practice, from the date of ~~redemption~~the Merger Agreement until the closing of the Merger, and not to take certain actions prior to the closing of the Merger without the prior written consent of Parent (which consent shall not be unreasonably withheld, conditioned or delayed). The Company has made certain additional customary covenants, including, subject to certain exceptions: (i) to cause a meeting of the Company’s shareholders to be held to consider approval of the Merger Agreement, (ii) not to solicit proposals relating to alternative business combination transactions and not to participate in discussions concerning, or furnish information in connection with, alternative business combination transactions and (iii) not to withdraw its recommendation to the Company’s shareholders regarding the Merger. In addition, subject to the terms of the Merger Agreement, the Company, Parent and Merger Sub are required to use reasonable best efforts to obtain all required regulatory approvals, which will include clearance under federal antitrust laws and certain approvals by federal and state regulatory bodies, subject to certain exceptions, including that such efforts not result in a Burdensome Condition (as defined in the Merger Agreement). Parent has obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which will be sufficient to consummate the Merger and the other transactions contemplated by the Merger Agreement, including payment of the aggregate Merger Consideration.

Consummation of the Merger is subject to various conditions, including: (i) approval of the shareholders of the Company, (ii) expiration or termination of the applicable HSR Act waiting period, (iii) receipt of all required regulatory and statutory approvals without the imposition of a Burdensome Condition, (iv) absence of any law or order prohibiting the consummation of the Merger and (v) other customary closing conditions, including (a) subject to materiality qualifiers, the accuracy of each party's representations and warranties, (b) each party's compliance in all material respects with its obligations and covenants under the Merger Agreement and (c) the absence of a material adverse effect with respect to the Company.

The Merger Agreement contains certain termination rights for both the Company and Parent, including if the Merger is not consummated by June 1, 2020 (subject to extension for an additional three months if all of the ~~2009 Series~~conditions to closing, other than the conditions related to obtaining regulatory approvals, have been satisfied). The Merger Agreement also provides for certain termination rights for each of the Company and Parent, and provides that, upon termination of the Merger Agreement under certain specified circumstances, Parent would be required to pay a termination fee of $170 million to the Company, and under other specified circumstances, the Company would be required to pay Parent a termination fee of $85 million.

On August 2, 2019, the Company filed a definitive proxy statement with the SEC in connection with the Merger. During 2019, 3 purported Company shareholders filed lawsuits alleging violations under the federal securities laws, 2 in the U.S. District Court for the Southern District of New York and 1 in the U.S. District Court for the District of Delaware, challenging the adequacy of the disclosures made in the Company's proxy statement in connection with the Merger as discussed in Part I, Item 1, Financial Statements, Note I of Notes to Financial Statements. NaN of the lawsuits was voluntarily dismissed on January 29,

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2020; 1 of the lawsuits was dismissed for want of prosecution on March 6, 2020; and the plaintiff in the other lawsuit filed has informed the court of his intention to dismiss the case and seek a mooting fee.

On August 13, 2019, the Company, Parent and IIF US Holding 2 LP, an affiliate of IIF, as applicable, filed (i) the joint report and application for regulatory approvals with the PUCT requesting approval of the Merger pursuant to the PURA, which was assigned PUCT Docket No. 49849, (ii) the joint application for regulatory approvals with the NMPRC requesting approval of the Merger pursuant to the NMPUA and NMPRC Rule 450, which was assigned NMPRC Case No. 19-00234-UT, (iii) the joint application requesting approval of the Merger with the FERC under Section 203 of the Federal Power Act, which was assigned FERC Docket No. EC19-120-000, and (iv) the joint application for regulatory approval for the indirect transfer of the Company’s NRC licenses to Parent from the NRC under the Atomic Energy Act of 1954, which was assigned Docket ID NRC-2019-0214. In addition, on August 13, 2019, the Company and Parent sought the authorization of the FCC to assign or transfer control of the Company’s FCC licenses under FCC File No. 008737430. On December 4, 2019, the Company and Parent received consent from the FCC to transfer the Company's FCC licenses.

On August 16, 2019, the Company and Parent filed the notification and report form with the Antitrust Division of the Department of Justice and the FTC under the HSR Act, which was assigned Transaction Identification No. 2019 1858. On September 3, 2019, the Company and Parent received notice from the FTC granting early termination of the waiting period under the HSR Act.

At a special meeting of the Company's shareholders held on September 19, 2019, the Company’s shareholders approved the Merger Agreement and the transactions contemplated thereby, including the Merger, and the compensation that will or may become payable by the Company to its named executive officers in connection with the Merger.

Under the Merger Agreement, the consent to the Merger by the City of El Paso under its franchise agreement with the Company is a condition to the closing of the Merger. Under the franchise agreement, if the City of El Paso does not grant its consent to the Merger, the franchise agreement would terminate upon the closing of the Merger. On September 20, 2019, the Company submitted the Franchise Agreement Assignment Application to the City of El Paso to receive the City's consent to the Merger. On February 4, 2020, the City of El Paso passed Ordinance No. 019022 approving the Franchise Agreement Assignment Application and granting the City of El Paso's consent to the Merger.

On November 21, 2019, the Company and IIF reached an agreement in principle with the PUCT staff and most intervenors regarding the Merger. The PUCT issued an order delaying the hearing on the merits in order to assist in reaching a unanimous settlement. The parties continued discussions and provided an update on the status of settlement at the PUCT meeting on December 13, 2019. A ~~7.25% PCBs~~non-unanimous settlement was filed with the PUCT on December 18, 2019, resolving substantially all issues in the application. The hearing at the PUCT on the non-unanimous issues was held on January 7, 2020, at the conclusion of which the PUCT requested the Company and IIF attend the PUCT's January 16, 2020 open meeting to answer any follow-up questions. On January 16, 2020, the PUCT approved the Merger and issued its final order on January 28, 2020.

On January 3, 2020, the Company and IIF filed an unopposed stipulation with the NMPRC regarding the Merger. A hearing at the NMPRC for the unopposed stipulation was held on January 16, 2020. On January 16, 2020, the Hearing Examiner agreed with the consent of parties to waive briefing. On February 12, 2020, the Hearing Examiner issued an Amended Certification of the Stipulation in which it is recommended that the NMPRC approve the unopposed stipulation subject to the parties agreeing to the Hearing Examiner's modifications. A final order adopting the Certification of the Stipulation and approving the Merger was issued by the NMPRC on March 11, 2020.

On March 6, 2020, the NRC's staff approved the joint application for the indirect transfer of control of the Company’s ownership in Palo Verde to IIF.

EL PASO ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

FERC required that the proposed mitigation be filed within 45 days of the issuance of the FERC Order. On April 15, 2020, the Company and IIF filed proposed mitigation options with the FERC. The matter is pending final approval from the FERC.

The Company and IIF have agreed to numerous regulatory commitments in connection with the Merger under the agreements with the PUCT, NMPRC, and the City of El Paso discussed above. Among the commitments that will apply to the Company as of the closing of the Merger are the issuance of rate credits to its Texas customers in a total aggregate ~~principal~~ amount of ~~$63.5~~$21 million and ~~all~~to New Mexico customers of ~~the 2009 Series B 7.25% PCBs with an aggregate principal amount of $37.1 million, on February 1, 2019 and April 1, 2019, respectively, utilizing funds borrowed under the RCF.~~$8.7 million. Both rate credits will be distributed among customers in 36 monthly installments. The Company is ~~currently holding~~required to make tariff filings to implement the ~~PCBs~~rate credits no later than 45 days and ~~may remarket them or replace them~~7 days, respectively, in Texas and New Mexico after the closing of the Merger. The Company made its required tariff filing in Texas under PUCT Docket No. 50477 on March 13, 2020. The Company has agreed not to attempt to recover the value of these rate credits in future rate cases.

In connection with ~~debt instruments~~the Merger, the Company recorded $1.3 million of ~~equivalent value at a future date depending on~~strategic transaction costs, including expenses for legal and other consulting costs, in the three months ended March 31, 2020, which are reflected in Other income (deductions) - Strategic transaction costs in the Company's ~~financing needs and market conditions, and~~Statements of Operations. The Company will not attempt to recover strategic transaction costs in ~~accordance~~future rate cases. The Company will reflect any non-deductible amounts in the effective tax rate at the Merger closing date.

For more information regarding the terms of the Merger, including a copy of the Merger Agreement, see the Company's Current Report on Form 8-K filed with the ~~Company's regulators' approvals.~~SEC on June 3, 2019, and its definitive proxy statement relating to the special meeting of shareholders filed with the SEC on August 2, 2019.

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

El Paso Electric Company:

Results of Review of Interim Financial Information

We have reviewed the balance sheet of El Paso Electric Company (the ~~"Company")~~Company) as of March 31, ~~2019~~2020, the related statements of operations and comprehensive operations for the three-month and twelve-month periods endedMarch 31, ~~2019~~2020 and ~~2018,~~2019, the related statements of changes in common stock equity for the three-month periods ended March 31, 2020 and 2019, the related statements of cash flows for the three-month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, and the related condensed notes (collectively, the interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheet of the Company as of December 31, ~~2018,~~2019, and the related statements of operations, ~~and~~ comprehensive operations, changes in common stock equity, and cash flows for the year then ended (not presented herein); and in our report dated February ~~28, 2019,~~26, 2020, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, ~~2018,~~2019, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Basis for Review Results

This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Houston, Texas

May ~~8, 2019~~7, 2020


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this Item 2 updates, and should be read in conjunction with, the information set forth in Part II, Item 7 of the ~~2018~~2019 Form 10-K.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Quarterly Report on Form 10-Q, other than statements of historical fact, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the ~~Securities~~ Exchange Act of ~~1934, as amended (the "Exchange Act").~~1934. Forward-looking statements often include words like "believe", "anticipate", "target", "project", "expect", "predict", "pro forma", "estimate", "intend", "will", "is designed to", "plan", and words of similar meaning, or are indicated by the Company's discussion of strategies or trends. Forward-looking statements describe the Company's future plans, objectives, expectations or goals. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurances can be given that these expectations will prove to be correct. Such statements address future events and conditions and include, but are not limited to:

capital expenditures,

earnings,

liquidity and capital resources,

ratemaking/regulatory matters/compliance matters,

litigation,

accounting matters, including accounting for taxes and leases,

possible corporate restructurings, acquisitions and dispositions, including the Merger,

compliance with debt and other restrictive covenants,

interest rates and dividends,

environmental matters,

nuclear operations,

operation of the Company's generating units and its transmission and distribution systems,

the availability and costs of new and/or emerging technologies, and

the overall economy of the Company's service area.

These forward-looking statements are based on assumptions and analyses in light of the Company's experience and perception of historical trends, current conditions, expected future developments, and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Factors that would cause or contribute to such differences include, but are not limited to:

the impact of the COVID-19 pandemic and its effect on the Company, its business, vendors, customers and the communities it serves, U.S. and world financial markets, potential regulatory actions, changes in customer and stakeholder behaviors and impacts on and modifications to the Company’s operations, business, and financial condition relating thereto,

decisions and actions of the Company's regulators and the resulting impact on the Company's operations, cost of capital, sales, and profitability,

the Company's ability to fully and timely recover its costs and earn a reasonable rate of return on its invested capital through the rates that it is permitted to charge,

rates, cost recovery mechanisms and other regulatory matters including the ability to recover fuel costs on a timely basis,

the ability of the Company's operating partners to maintain plant operations and manage ~~operations and maintenance ("~~O~~&M")~~&M costs at Palo Verde and its related transmission facilities, including costs to comply with any new or expanded regulatory or environmental requirements,

reductions in output at generation plants operated by the Company,

the size of the Company's construction program and its ability to complete construction on budget and on time,

the receipt of required approvals by the Company's regulators and other permits related to the Company’s construction programs,

the Company's reliance on significant customers,

the credit worthiness of the Company's customers,

unscheduled outages of generating units including outages at Palo Verde,

changes in customers' demand for electricity as a result of energy efficiency initiatives and emerging competing services and technologies, including distributed generation and battery storage,

individual customer groups, including distributed generation customers, may not pay their full cost of service, and other customers may or may not be required to pay the difference,

changes in, and the assumptions used for, pension and other post-retirement and post-employment benefit liability calculations, as well as actual and assumed investment returns on pension plan and other post-retirement plan assets,

the impact of changing cost escalation and other assumptions on the Company's nuclear decommissioning liability for Palo Verde, as well as actual and assumed investment returns on assets in the NDT,

disruptions in the Company's transmission and distribution systems, and in particular the transmission lines that deliver power from its remote generating facilities,

the sufficiency of the Company's insurance coverage, including availability, cost, coverage and terms,

electric utility deregulation or re-regulation,

regulated and competitive markets,

ongoing municipal, state and federal activities,

cuts in military spending or prolonged shutdowns of the federal government that reduce demand for the Company's services from military and governmental customers,

political, legislative, judicial and regulatory developments,

homeland security considerations, including those associated with the U.S./Mexico border region and the energy industry,

changes in environmental laws and regulations and the enforcement or interpretation thereof, including those related to air, water or greenhouse gas emissions or other environmental matters,

economic, commercial bank, financial and capital market conditions,

increases in cost of capital,

the impact of changes in interest rates or rates of inflation,

actions by credit rating agencies,

changes in accounting requirements and other accounting matters,

changing weather trends and the impact of severe weather conditions,

possible physical or cyber attacks, intrusions or other catastrophic events,

the impact of lawsuits filed against the Company,

Texas, New Mexico and electric industry utility service reliability standards and service requirements,

uranium, natural gas, oil and wholesale electricity prices and availability,

possible income tax and interest payments as a result of audit adjustments proposed by the U.S. Internal Revenue Service or state taxing authorities,

the impact of ~~recent~~ changes to U.S. tax laws,

the impact of international trade and tariff negotiations,

the impact of U.S. health care reform legislation,

the effectiveness of the Company's risk management activities,

~~the Company's ability to successfully renegotiate its collective bargaining agreement,~~

loss of key personnel, the Company's ability to recruit and retain qualified employees and the Company's ability to successfully implement succession planning, ~~and~~

other circumstances affecting anticipated operations, sales and ~~costs.~~costs, and

certain risks and uncertainties associated with the Merger including, without limitation:


◦	the risk that Parent or the Company may be unable to obtain governmental and regulatory approvals required for the Merger, or that required governmental and regulatory approvals or agreements with other parties interested therein may delay the Merger, may subject the Merger to or impose adverse conditions or costs or may cause the parties to abandon the Merger,


◦	the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger or could otherwise cause the failure of the Merger to close,


◦	the risk that a condition to the closing of the Merger may not be satisfied or waived,


◦	the failure of Parent to obtain any financing necessary to complete the Merger,


◦	the outcome of any legal proceedings, regulatory proceedings or enforcement matters that have been or may be instituted relating to the Merger,


◦	the receipt of an unsolicited offer from another party to acquire assets or capital stock of the Company that could interfere with the Merger,


◦	the timing to consummate the Merger,


◦	the costs incurred to consummate the Merger,


◦	the risk that the pendency of the Merger disrupts current plans and operations and the potential difficulties in maintaining relationships with customers, employees, regulators or suppliers, and


◦	the diversion of management time and attention from the Company’s ongoing business operations due to the Merger.

These lists are not all-inclusive because it is not possible to predict all factors. A discussion of some of these factors is included in the ~~2018~~2019 Form 10-K under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Policies and Estimates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". This Quarterly Report on Form 10-Q should be read in its entirety. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Any forward-looking statement speaks only as of the date such statement was made, and the Company is not obligated to update any forward-looking statement to reflect events or circumstances after the date on which such statement was made, except as required by applicable laws or regulations.

Summary of Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes for the periods presented and actual results could differ in future periods from those estimates. Critical accounting policies and estimates are both important to the portrayal of our financial condition and results of operations and require complex, subjective judgments and are more fully described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the ~~2018~~2019 Form 10-K.

Significant Events

COVID-19 Impacts

On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the U.S. declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state, and local governments have imposed varying degrees of restrictions on business and social activities to contain the spread of COVID-19, including quarantine and “stay-at-home” orders and directives in our service territory. The pandemic and directives have significantly impacted many sectors of the economy, including record levels of unemployment, with businesses, nonprofit organizations, and governmental entities modifying, curtailing or ceasing normal operations. We also have modified certain business practices to conform to government restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization, and other governmental and regulatory authorities.

As the pandemic has unfolded, the Company has established a task force whereby management personnel of each business unit have assessed and updated its existing business continuity plans as it specifically relates to the COVID-19 pandemic. Since mid-March, we have restricted access to our administrative and field offices, including customer service centers, and directed employees who can effectively work from home to do so. We continue to work effectively through alternative work arrangements, leveraging our technology platform to support our employees working remotely to serve customers. Where we must maintain a presence in the field, we have adjusted our operational protocols to minimize exposure and risk to our field personnel, customers and the communities we serve. These changes include, among other things, modifying our work schedules and reporting locations, postponing certain work types, such as non-critical maintenance and capital projects, acquiring additional on-hand equipment, materials and supplies, and adjusting project scope and scale to adhere to safety protocols. Through the date of this Quarterly Report on Form 10-Q, it has not been necessary to significantly modify our business processes and procedures to maintain the integrity and effectiveness of our operational, financial information and communication systems, including those of our outside service providers. Additionally, we have taken measures to further enhance the security of systems to serve operational and financial needs, including those of our remote workforce.

The first priority in our response to this crisis has been the health and safety of our employees, customers, and other business counterparties. We have implemented preventative measures and developed corporate response plans to minimize unnecessary risk of exposure and the spread of infection, while supporting our customers’ operations to the best of our ability under the current circumstances. We have contracted and are working with healthcare professionals to provide us with additional guidance on various healthcare issues, to assist us with creating new policies emphasizing social distancing and personal hygiene practices, and to implement employee screening procedures. We are procuring larger quantities of safety materials and disinfecting materials, including facial coverings/masks, gloves and sanitizing supplies, and have increased the frequency with which Company facilities where employees are still reporting to work are cleaned. We have restricted employee travel and work locations, and limited physical participation in meetings, events, and conferences to only those considered to be critical to the operations of the Company.

Consistent with the orders of the PUCT and NMPRC and to support our customers during this crisis, we have taken steps to assure our residential customers that disconnections for non-payment are temporarily suspended and customers will not incur late payment charges. We have also increased our communications with our customers and are offering bill payment alternatives and assistance programs, in addition to providing other service announcements. While all of our customer payment center lobbies have closed until further notice, all drive-through windows remain open and payment drop boxes at all customer service locations remain available to accept payments at any time.

Although our sales for the three months ended March 31, 2020 were not significantly impacted by the COVID-19 outbreak, since the implementation of the stay-at-home laws and ordinances issued by the federal, state, and local authorities in late March, modest declines in our overall revenue stream and a migration of our energy sales from the small commercial customer revenue class to residential customers have occurred. As reported in our 2019 Form 10-K, sales to residential customers and small commercial customers represented 48% and 31%, respectively, for the twelve months ended December 31, 2019. Depending on the severity and duration of the pandemic, future sales are likely to continue to decline and shift from small commercial customers to residential customers. Through the date of this Quarterly Report on Form 10-Q, we have also experienced decreases in our collections primarily related to our residential and commercial customers. Accordingly, we have increased our bad debt reserve by $275,000 as of March 31, 2020. We are continuing to monitor our collection rates and bad debt write-offs and will record additional reserves as appropriate.

Through the date of this Quarterly Report on Form 10-Q, we have not experienced significant increases in our O&M costs; however, depending on the duration and severity of the COVID-19 pandemic, costs, including labor, contractors, medical claims, repairs and maintenance, material supplies, rentals, and interest could increase. Working with our manufacturers and suppliers to understand the potential impacts to our supply chain is also a priority. These efforts include identifying and mitigating possible negative impacts to fuel resources, equipment deliveries, and material supplies, and planning for longer-term emergency response

protocols. This is a rapidly evolving situation that could lead to extended disruption of economic activity in our service territory. We continue to monitor developments affecting our workforce, customers and suppliers and will take additional precautions as necessary.

The Company incurred $33.2 million in losses for the three months ended March 31, 2020, related to market value declines in the NDT fund investment portfolio. Of this amount, $12.1 million and $23.1 million were reported in February 2020 and March 2020, respectively. These losses are largely attributable to the adverse impact on the domestic and worldwide financial markets of the COVID-19 outbreak. Through the date of this Quarterly Report on Form 10-Q, we have observed some recovery in market values of the portfolio; however, the market has been volatile, and is likely to continue to be volatile as developments related to the pandemic and the economy evolve.

In addition, we have implemented certain measures to provide additional financial flexibility and maintain liquidity. For further information, see “Liquidity and Capital Resources” in Item 2 of Part I of this Quarterly Report on Form 10-Q.

While we continue to assess the impact of COVID-19 on our business, we cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows, liquidity, financial condition, and results of operations at this time, due to the numerous uncertainties that exist. The ultimate impact will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments and/or vaccines, the duration of the outbreak, actions taken by governmental authorities, customers, vendors and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. An extended slowdown of economic growth in the U.S. could result in lower growth and reduced demand for and usage of electricity in our service territory as facilities continue to close or remain closed. The ability of our customers, contractors and suppliers to meet their obligations to us, including payment obligations, could also be affected under the current economic conditions. For additional discussion regarding risks associated with the COVID-19 pandemic, see “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q.

Merger with Sun Jupiter Holdings LLC

On June 1, 2019, the Company entered into the Merger Agreement, by and among the Company, Parent, and Merger Sub. Pursuant to the Merger Agreement, on and subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation in the Merger and becoming a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of IIF. See Part I, Item 1, Financial Statements, Note M of Notes to Financial Statements for a discussion of the Merger.

Summary

The following is an overview of our results of operations for the three and twelve-month periods ended March 31, ~~2019~~2020 and ~~2018~~2019. Net income (loss) and basic earnings (loss) per share for the three and twelve-month periods ended March 31, ~~2019~~2020 and ~~2018~~2019, are shown below:


	Three Months Ended					Twelve Months Ended				Three Months Ended					Twelve Months Ended
	March 31,					March 31,				March 31,					March 31,
	2019		2018			2019		2018		2020			2019		2020		2019
Net income (loss) (in thousands)	$	6,089	$	(6,966	)	$	97,370	$	95,285	$	(35,209	)	$	6,089	$	81,739	$	97,370
Basic earnings (loss) per share	0.15		(0.17		)	2.39		2.35		(0.87		)	0.15		2.01		2.39

The following table shows the primary factors affecting the after-tax change in net income (loss) between the ~~2019~~2020 and ~~2018~~2019 periods presented (in thousands):

Three Months Ended Twelve Months Ended
March 31, 2018 net income (loss) $ (6,966 ) $ 95,285
Change in (net of tax at 21%):
Increased investment and interest income, NDT (a) 14,839
63
Increased wheeling revenues (b) 1,358
2,065
Increased retail non-fuel base revenues (c) 882
104
Decreased Palo Verde operations and maintenance expenses (d) 657
3,404
(Increased) decreased income tax expense-other (e) (1,327 ) 15,344
Increased depreciation and amortization (f) (1,036 ) (3,927 )
Increased interest charges (credits) (g) (939 ) (1,866 )
Increased transmission and distribution operation and
maintenance expenses (h)
(781 ) (2,374 )
Decreased deregulated Palo Verde Unit 3 revenues (i) (456 ) (1,512 )
Increased operations and maintenance expenses at fossil-fuel generating plants (j) (416 ) (5,559 )
Palo Verde performance rewards, net (k) —
(3,954 )
Other 274
297
March 31, 2019 net income $ 6,089
$ 97,370



	Three Months Ended			Twelve Months Ended
March 31, 2019 net income	$	6,089		$	97,370
Change in (net of tax):
Decreased investment and interest income, NDT (a)	(39,780		)	(13,179		)
(Increased) decreased operations and maintenance expenses at fossil-fuel generating plants (b)	(1,106		)	1,702
Strategic transaction costs (c)	(1,065		)	(11,279		)
Increased depreciation and amortization (d)	(1,059		)	(4,518		)
Decreased other changes in income taxes (e)	1,875			4,976
Increased retail non-fuel base revenues (f)	588			7,253
Other	(751		)	(586		)
March 31, 2020 net income (loss)	$	(35,209	)	$	81,739

______________

All information presented below is expressed in pre-tax amounts except when stated otherwise.

(a)

Investment and interest income, ~~increased~~NDT decreased for the three and twelve months ended March 31, 2020, compared to the three and twelve months ended March 31, 2019, ~~compared to the three months ended March 31, 2018,~~ primarily due to net realized and unrealized ~~gains~~losses on securities held in the NDT. ~~Beginning on January 1, 2018,~~These market losses experienced by the Company ~~adopted ASU 2016-01, Financial Instruments, and began recording unrealized gains and losses on equity securities held~~were in line with declines in the ~~NDT directly in earnings.~~ financial markets worldwide and were largely attributable to the growing impact of the COVID-19 pandemic. Refer to "Use of Non-GAAP Financial Measures" below for further details.


(b)	~~Wheeling revenues~~O&M expenses at our fossil-fuel generating plants increased for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to increased maintenance costs at Newman and increased outage costs at Newman Unit 5. These increases were partially offset by decreased outage costs at Newman Unit 4.

O&M expenses at our fossil-fuel generating plants decreased for the twelve months ended March 31, 2020, compared to the twelve months ended March 31, 2019, primarily due to decreased outage costs at Newman Units 1, 2 and 4. These decreases were partially offset by increased maintenance costs at Newman and Rio Grande Power Station ("Rio Grande"), and increased outage costs at Newman Unit 5.


(c)	Strategic transaction costs for the three and twelve months ended March 31, ~~2019,~~2020, compared to the three and twelve months ended March 31, ~~2018, primarily~~2019, due to ~~an increase~~costs incurred in ~~short-term hourly transmission sales due to favorable market conditions.~~connection with the Merger.

~~(c)~~

Retail non-fuel base revenues, excluding the impact of rate changes, increased for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to increased revenues from residential customers of $1.2 million caused by increased kWh sales that resulted from an increase in the average number of residential customers served and favorable weather compared to the three months ended March 31, 2018.


(d)	Decreased Palo Verde O&M expenses for the twelve months ended March 31, 2019, compared to the twelve months ended March 31, 2018, primarily due to (i) lower incentives, (ii) administrative and general ("A&G") benefits, and (iii) a decrease in property insurance costs.


~~(e)~~	Increased income tax expense-other for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to differences in the annual effective tax rate and lower values of vested stock incentives.

Decreased income tax expense-other for the twelve months ended March 31, 2019, compared to the twelve months ended March 31, 2018, primarily due to a decrease in the federal corporate income tax rate from 35% to 21%, excluding the tax impact of other items in the table above, and other permanent differences.


~~(f)~~	Depreciation and amortization increased for the three and twelve months ended March 31, ~~2019,~~2020, compared to the three and twelve months ended March 31, ~~2018, primarily~~2019, due to increased plant balances.

~~(g)~~(e)

~~Interest charges (credits)~~Other changes in income taxes decreased for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to (i) earnings in the NDT which are taxed at 20%, (ii) the allowance for equity funds used during construction ("AEFUDC"), (iii) lower interest costs related to tax reserves, and (iv) tax benefits related to stock incentives.

Other changes in income taxes decreased for the twelve months ended March 31, 2020, compared to the twelve months ended March 31, 2019, primarily due to (i) earnings in the NDT which are taxed at 20%, (ii) the AEFUDC, (iii) lower interest costs related to tax reserves, (iv) decreased state income taxes, and (v) tax benefits related to stock incentives.

(f)

Retail non-fuel base revenues increased for the three months ended March 31, ~~2019,~~2020, compared to the three months ended March 31, ~~2018,~~2019, primarily due to ~~interest expense on the $125.0~~a $1.8 million ~~aggregate principal amount of 4.22% Senior Notes due 2028 issued in June 2018, and an~~ increase in revenues related to the ~~interest cost component of net periodic benefit cost of the Company’s employee benefit plans. These increases were partially offset~~TCRF settlement agreement approved by the ~~purchase~~PUCT in ~~lieu~~Docket No. 49148 on December 16, 2019 and a $1.7 million increase in revenues related to the DCRF settlement agreement approved by the PUCT in Docket No. 49395 on September 27, 2019. Excluding the impact of ~~redemption~~rate changes, retail non-fuel base revenues for the three months ended March 31, 2020 decreased $2.8 million compared to the three months ended March 31, 2019, primarily due to decreased revenues from (i) sales to public authorities of ~~$63.5~~$1.1 million ~~principal amount of 2009 Series A 7.25% PCBs on February 1, 2019.~~

~~Interest charges (credits)~~

caused by decreased kWh sales, (ii) small commercial and industrial customers of $0.8 million caused by decreased kWh sales, and (iii) large commercial and industrial customers of $0.5 million.

Retail non-fuel base revenues increased for the twelve months ended March 31, ~~2019,~~2020, compared to the twelve months ended March 31, ~~2018,~~2019, primarily due to ~~interest expense~~(i) a $4.8 million increase related to the TCRF settlement agreement approved by the PUCT in Docket No. 49148 on the $125.0 million aggregate principal amount of 4.22% Senior Notes due 2028 issued in June 2018. This increase was partially offset by (i) the purchase in lieu of redemption of $63.5 million principal amount of 2009 Series A 7.25% PCBs on February 1,December 16, 2019, (ii) ~~increased allowance for borrowed funds used during construction ("ABFUDC") as~~ a ~~result of higher average balances of construction work~~$3.6 million increase related to the DCRF settlement agreement approved by the PUCT in ~~progress ("CWIP")~~Docket No. 49395 on September 27, 2019, and an(iii) a $2.8 million increase related to the 1% increase in the ~~ABFUDC~~City of El Paso franchise fee on gross revenues for services within the City of El Paso, applicable to customer billings issued on or after October 1, 2018. Excluding the impact of rate changes, retail non-fuel base revenues for the twelve months ended March 31, 2020 decreased $2.0 million compared to the twelve months ended March 31, 2019, primarily due to decreased revenues from (i) small commercial and ~~(iii) the redemption~~industrial customers of ~~$33.3~~$1.6 million ~~principal amount~~caused by decreased kWh sales and (ii) large commercial and industrial customers of ~~2012 Series A 1.875% PCBs in 2017.~~


~~(h)~~	Transmission and distribution O&M expenses increased for the twelve months ended March 31, 2019, compared to the twelve months ended March 31, 2018, primarily due to increases in payroll costs and Palo Verde transmission expenses due to storm repairs.

~~(i)~~

Deregulated Palo Verde Unit 3 revenues decreased for the twelve months ended March 31, 2019, compared to the twelve months ended March 31, 2018, primarily due to (i) a 12.4% decrease in proxy market prices, reflecting a decline in the price of natural gas, and (ii) a decrease in generation of 7.6%, caused by a spring refueling outage at Unit 3 completed in May 2018, with no comparable outage in the twelve months ended March 31, 2018.

~~(j)~~

O&M expenses at our fossil-fuel generating plants increased for the twelve months ended March 31, 2019, compared to the twelve months ended March 31, 2018, primarily due to outage costs related to Newman Units 2 & 4 and increased maintenance costs at Newman, Montana, and Rio Grande Power Station ("Rio Grande") in the twelve months ended March 31, 2019. These increases were partially offset by outage costs at Rio Grande Unit 8 during the twelve months ended March 31, 2018.

~~(k)~~

Palo Verde performance rewards of $5.0 million, 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, were recorded in June 2017, with no comparable amount in the twelve months ended March 31, 2019.

$0.8 million.

Use of Non-GAAP Financial Measures

As required by ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities, changes in the fair value of equity securities are recognized in the Company's Statements of Operations. This standard added the potential for significant volatility to the Company's reported results of operations as changes in the fair value of equity securities may occur. Furthermore, the equity investments included in the NDT are significant and are expected to increase significantly during the remaining life (estimated to be 2725 to 3028 years) of Palo Verde. Accordingly, the Company has provided the following non-GAAP financial measures to exclude the impact of changes in fair value of equity securities and realized gains (losses) from the sale of both equity and fixed income securities. Reconciliations of both non-GAAP financial measures to the most directly comparable financial information presented in accordance with GAAP are presented in the ~~table~~tables below. Non-GAAP adjusted net income (loss) is reconciled to GAAP net income (loss), and non-GAAP adjusted basic earnings (loss) per share is reconciled to GAAP basic earnings (loss) per share.


	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2019			2018			2020 (1)			2019
	(In thousands except for per share data)						(In thousands except for per share data)
Net income (loss) (GAAP)	$	6,089		$	(6,966	)	$	(35,209	)	$	6,089
Adjusting items before income tax effects
Unrealized (gains) losses, net	(16,690		)	3,781			33,188			(16,690		)
Realized (gains) losses, net	701			(1,272		)	(24		)	701
Total adjustments before income tax effects	(15,989		)	2,509			33,164			(15,989		)
Income taxes on above adjustments	3,198			(502		)	(6,633		)	3,198
Adjusting items, net of income taxes	(12,791		)	2,007			26,531			(12,791		)
Adjusted net loss (non-GAAP)	$	(6,702	)	$	(4,959	)	$	(8,678	)	$	(6,702	)

Basic earnings (loss) per share (GAAP)	$	0.15		$	(0.17	)	$	(0.87	)	$	0.15
Adjusted basic loss per share (non-GAAP)	$	(0.17	)	$	(0.12	)	$	(0.21	)	$	(0.17	)


(1)	Net income (loss) (GAAP) and Adjusted net loss (non-GAAP) include a pre-tax charge of $1.3 million, or $0.03 per share, after-tax, of strategic transaction costs.


	Twelve Months Ended						Twelve Months Ended
	March 31,						March 31,
	2019			2018			2020 (1)			2019
	(In thousands except for per share data)						(In thousands except for per share data)
Net income (GAAP)	$	97,370		$	95,285		$	81,739		$	97,370
Adjusting items before income tax effects
Unrealized (gains) losses, net	(1,870		)	3,781			14,026			(1,870		)
Realized gains, net	(3,661		)	(9,707		)	(3,387		)	(3,661		)
Total adjustments before income tax effects	(5,531		)	(5,926		)	10,639			(5,531		)
Income taxes on above adjustments	1,107			1,185			(2,128		)	1,107
Adjusting items, net of income taxes	(4,424		)	(4,741		)	8,511			(4,424		)
Adjusted net income (non-GAAP)	$	92,946		$	90,544		$	90,250		$	92,946

Basic earnings per share (GAAP)	$	2.39		$	2.35		$	2.01		$	2.39
Adjusted basic earnings per share (non-GAAP)	$	2.28		$	2.23		$	2.21		$	2.28


(1)	Net income (GAAP) and Adjusted net income (non-GAAP) include a pre-tax charge of $13.4 million, or $0.28 per share, after-tax, of strategic transaction costs.

Adjusted net income (loss) and adjusted basic earnings (loss) per share are not measures of financial performance under GAAP and should not be considered as an alternative to net income (loss) and basic earnings (loss) per share, respectively. Furthermore, the Company's presentation of any non-GAAP financial measure may not be comparable to similarly titled measures used by other

companies. The Company believes adjusted net income (loss) and adjusted basic earnings (loss) per share are useful financial measures for investors and analysts in understanding the Company's core operating performance because each measure removes the effects of variances reported in the Company's results of operations that are not indicative of fundamental changes in the earnings capacity of the Company. Non-GAAP financial information should be read together with, and is not an alternative or substitute for, the Company's financial results reported in accordance with GAAP.

Historical Results of Operations

The following discussion includes detailed descriptions of factors affecting individual line items in the results of operations. The amounts presented below are presented on a pre-tax basis.

Operating revenues

We realize revenue from the sale of electricity to retail customers at regulated rates and the sale of energy in the wholesale power market generally at market-based prices. Sales for resale to our sole full ~~requirement~~requirements customer (which are FERC-regulated cost-based wholesale sales within our service territory) accounted for less than 1% of revenues.

Revenues from the sale of electricity include fuel costs that are recovered from our customers through fuel adjustment mechanisms. We record deferred fuel revenues for the difference between actual fuel costs and recoverable fuel revenues until such amounts are collected from or refunded to customers. "Non-fuel base revenues" refers to our revenues from the sale of electricity excluding such fuel costs.

No retail customer accounted for more than 3% of our non-fuel base revenues for the three and twelve months ended March 31, ~~2019.~~2020. Residential and small commercial customers represent approximately 79% of our non-fuel base revenues. While this customer base is more stable, it is also more sensitive to changes in weather conditions. The current rate structures in Texas and New Mexico reflect higher base rates during the peak summer season of May through October and lower base rates during November through April for our residential and small commercial and industrial customers. As a result, our business is seasonal, with higher kWh sales and revenues during the summer cooling season.

Weather significantly impacts our residential, small commercial and industrial customers, and to a lesser extent, our sales to public authorities. Heating and cooling degree days can be used to evaluate the effect of weather on energy use. For each degree the average outdoor temperature varies from a standard of 65 degrees Fahrenheit, a degree day is recorded. For the three and twelve months ended March 31, ~~2019,~~2020, retail non-fuel base revenues were ~~positively~~negatively impacted by ~~favorable~~overall milder weather when compared to the three and twelve months ended March 31, ~~2018.~~2019. The table below shows heating and cooling degree days compared to a 10-year average for the periods in ~~2019~~2020 and ~~2018.~~2019.


	Three Months Ended			Twelve Months Ended			Three Months Ended			Twelve Months Ended
	March 31,			March 31,			March 31,			March 31,
			10-Year			10-Year			10-Year			10-Year
	2019	2018	Average	2019	2018	Average*	2020	2019	Average	2020	2019	Average*
Heating degree days	1,134	965	1,123	2,106	1,677	2,056	1,079	1,134	1,092	2,076	2,106	2,055
Cooling degree days	36	37	35	3,173	2,882	2,863	12	36	35	2,983	3,173	2,887

~~______________~~________________________

* Calendar year basis.

Customer growth is a key driver of the growth of retail sales. The average number of retail customers grew ~~1.6%~~1.9% and 1.7% for the three and twelve months ended March 31, ~~2019~~2020, when compared to the three and twelve months ended March 31, ~~2018.~~2019, respectively. See the tables presented on pages 4043 and ~~41,~~44, which provide detail on the average number of retail customers and the related revenues and kWh sales.

Retail non-fuel base revenues. For the three months ended March 31, 2020, retail non-fuel base revenues increased $0.7 million, or 0.7%, compared to the three months ended March 31, 2019. Retail non-fuel base revenues increased primarily due to rate changes, which included (i) a $1.8 million increase related to the TCRF settlement agreement approved by the PUCT in Docket No. 49148 on December 16, 2019, applicable to customer billings issued on or after January 1, 2020 and (ii) a $1.7 million increase related to the DCRF settlement agreement approved by the PUCT in Docket No. 49395 on September 27, 2019, applicable to customer billings issued on or after October 1, 2019. Excluding the impact of rate changes, retail non-fuel base revenues for the three months ended March 31, ~~2019 increased $1.1~~2020, decreased $2.8 million, ~~or 1.0%,~~ compared to the three months ended March 31, ~~2018. Retail non-fuel base revenues increased~~2019. This decrease was primarily due to ~~increased~~decreased revenues from ~~residential customers~~(i) sales to public authorities of ~~$1.2~~$1.1 million caused by a ~~2.6% increase~~0.2% decrease in kWh sales, ~~which were driven~~(ii) small commercial and industrial customers of $0.8 million caused by ~~an increase~~a 2.0% decrease in kWh sales, and (iii) large commercial and industrial customers of ~~1.6% in the average number of residential customers served and favorable weather,~~$0.5 million, compared to the three months ended March 31, ~~2018.~~2019. Heating degree days decreased 4.9% in the three months ended March 31, 2020, when compared to the three months ended March 31, 2019.

Retail non-fuel base revenues for the twelve months ended March 31, 2020, increased $9.2 million, or 1.5%, compared to the twelve months ended March 31, 2019. Retail non-fuel base revenues increased primarily due to rate changes, which included (i) a $4.8 million increase related to the TCRF settlement agreement approved by the PUCT in Docket No. 49148 on December 16, 2019, ~~increased $0.1~~(ii) a $3.6 million increase related to the DCRF settlement agreement approved by the PUCT in Docket No. 49395 on September 27, 2019, applicable to customer billings issued on or after October 1, 2019, and (iii) a $2.8 million increase related to the 1% increase in the City of El Paso franchise fee on gross revenues for services within the City of El Paso, applicable to

customer billings issued on or after October 1, 2018. Excluding the impact of rate changes, retail non-fuel base revenues for the twelve months ended March 31, 2020, decreased $2.0 million, compared to the twelve months ended March 31, ~~2018. Retail non-fuel base revenues, excluding the impact of rate changes, increased~~2019. This decrease was primarily due to ~~(i) increased~~decreased revenues from residential customers of $15.9 million caused by a 5.8% increase in kWh sales that resulted from favorable weather and a 1.6% increase in the average number of residential customers served, compared to the twelve months ended March 31, 2018 and (ii) increased revenues from(i) small commercial and industrial customers of $1.6 million caused by ~~an increase~~a 1.4% decrease in kWh sales ~~that resulted from favorable weather~~ and ~~an increase in the average number of small~~(ii) large commercial and industrial customers ~~served,~~of $0.8 million, compared to the twelve months ended March 31, ~~2018. For~~2019. Heating degree days decreased 1.4% in the twelve months ended March 31, ~~2019, rate changes included~~2020, when compared to the ~~refunds~~twelve months ended March 31, 2019.

Fuel revenues. Fuel revenues are earned as and generally limited to ~~customers~~fuel and purchased power costs incurred. Fuel revenues are also reduced by economy sales margins that are required to be shared with customers. Fuel revenues increased $1.7 million for the ~~reduction in~~three months ended March 31, 2020, when compared to the ~~federal corporate income tax rate~~three months ended March 31, 2019, principally due to ~~the TCJA of approximately $29.2 million, compared to $4.9~~lower shared margins on economy sales, offset in part by decreased fuel costs. Fuel revenues decreased $39.5 million for the twelve months ended March 31, ~~2018. The reduction in rates~~2020, when compared to the twelve months ended March 31, 2019, principally due to ~~the TCJA was~~lower fuel and purchased power expenses offset in part by ~~non-fuel base rate increases of approximately $4.9 million related to the 2017 PUCT Final Order.~~decreased shared margins on economy sales.

~~Fuel revenues.~~Fuel revenues consist of revenues collected from customers under fuel recovery mechanisms approved by the state commissions and the FERC, and deferred fuel revenues, which are comprised of the difference between fuel costs and fuel revenues collected from customers. In New Mexico, fuel and purchased power costs, net of the cost of off-system sales and related shared margins, are reconciled to actual costs on a monthly basis and recovered or refunded to customers the second succeeding month. Additionally, the RPS costs for New Mexico are recovered through a separate RPS Cost Rider, which is updated annually. In Texas, fuel and purchased power costs, net of shared margins on off-system sales, are recovered through a fixed fuel factor. We can seek to revise our Texas fixed fuel factor based upon an approved formula at least four months after our last revision, except in the month of December. In addition, if we materially over-recover fuel costs, we must seek to refund the over-recovery, and if we materially under-recover fuel costs, we may seek a surcharge to recover those costs. Fuel over- and under-recoveries are defined as material when they exceed 4% of the previous twelve months' fuel costs.

In ~~the three and twelve months ended March 31,~~June 2019, ~~we over-recovered fuel costs by $12.8 million and $9.5 million, respectively. In March 2018, $1.1~~$1.0 million was credited to customers through the applicable fuel adjustment clauses as the result of a reimbursement from the DOE related to spent nuclear fuel storage. At March 31, 2019, we had a net fuel over-recovery balance of $23.8 million, including over-recoveries of $19.3 million in our Texas, $4.4 million in our New Mexico and $0.1 million in our FERC jurisdictions. 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. On April 13, 2018, we filed a request with the PUCT to decrease our Texas fixed fuel factor by approximately 29% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On April 25, 2018, our proposed fuel factors were approved by the PUCT on an interim basis effective for the first billing cycle of the May 2018 billing month. The revised factor was approved and the docket closed on May 22, 2018. On October 15, 2018, we filed a request with the PUCT to decrease our Texas fixed fuel factor by approximately 6.99% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On October 25, 2018, our fixed fuel factor was approved on an interim basis effective for the first billing cycle of the November 2018 billing month. The revised factor was approved by the PUCT and the docket closed on November 19, 2018. The Texas fixed fuel factor will continue thereafter until changed by the PUCT.

On April 29, 2019, we filed a petition with the PUCT, which was assigned PUCT Docket No. 49482, requesting authority to implement, beginning on June 1, 2019, a four-month, interim fuel refund of $19.4 million in fuel cost over-recoveries, including interest, for the period from April 2016 through March 2019. We cannot predict the outcome of this filing at this time.

Off-system sales. Off-system sales are sales into wholesale markets outside our service territory. Off-system sales are primarily made in off-peak periods when we have competitive generation capacity available after meeting our regulated service obligations. We have shared 100% of margins on non-arbitrage sales (as defined by the settlement approved in PUCT Docket No. 41852) and 50% of margins on arbitrage sales with our Texas customers since April 1, 2014. We are currently sharing 90% of off-system sales margins with our New Mexico customers (as reaffirmed in NMPRC Case No. 09-00171-UT), and 25% of our off-system sales margins with our sales for resale - full ~~requirement~~requirements customer under the terms of ~~its~~their contract. Palo Verde's availability is an important factor in realizing these off-system sales margins.

Off-system sales revenue ~~increased $11.9~~decreased $17.0 million, or ~~51.7%~~48.6%, for the three months ended March 31, ~~2019~~2020, compared to the three months ended March 31, ~~2018,~~2019, as a result of ~~higher~~lower average market prices for power. Off-system sales revenue ~~increased $30.5~~decreased $27.0 million, or ~~45.0%~~27.5%, for the twelve months ended March 31, ~~2019, when~~2020, compared to the twelve months ended March 31, ~~2018,~~2019, as a result of ~~a 15.2% increase in kWh sales due to additional available power, and higher~~lower average market prices for power.


Comparisons of kWh sales and operating revenues are shown below (in thousands):	Comparisons of kWh sales and operating revenues are shown below (in thousands):											Comparisons of kWh sales and operating revenues are shown below (in thousands):
							Increase (Decrease)											Increase (Decrease)
Three Months Ended March 31:	2019			2018			Amount			Percent
Three Months Ended March 31,												2020			2019			Amount			Percent
kWh sales:
Retail:
Residential	574,089			559,563			14,526			2.6	%	574,083			574,089			(6		)	—	%
Commercial and industrial, small	496,367			498,675			(2,308		)	(0.5	)	486,410			496,367			(9,957		)	(2.0	)
Commercial and industrial, large(1)	252,056			248,285			3,771			1.5		231,676			252,056			(20,380		)	(8.1	)
Sales to public authorities	331,947			328,329			3,618			1.1		331,249			331,947			(698		)	(0.2	)
Total retail sales	1,654,459			1,634,852			19,607			1.2		1,623,418			1,654,459			(31,041		)	(1.9	)
Wholesale:
Sales for resale - full requirement customer	11,770			11,730			40			0.3
Sales for resale - full requirements customer												11,281			11,770			(489		)	(4.2	)
Off-system sales	837,162			864,216			(27,054		)	(3.1	)	847,137			837,162			9,975			1.2
Total wholesale sales	848,932			875,946			(27,014		)	(3.1	)	858,418			848,932			9,486			1.1
Total kWh sales	2,503,391			2,510,798			(7,407		)	(0.3	)	2,481,836			2,503,391			(21,555		)	(0.9	)
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	54,452		$	53,292		$	1,160		2.2	%	$	55,579		$	54,452		$	1,127		2.1	%
Commercial and industrial, small	33,004			33,297			(293		)	(0.9	)	33,460			33,004			456			1.4
Commercial and industrial, large(1)	7,246			7,126			120			1.7		6,925			7,246			(321		)	(4.4	)
Sales to public authorities	17,285			17,156			129			0.8		16,769			17,285			(516		)	(3.0	)
Total retail non-fuel base revenues (1)	111,987			110,871			1,116			1.0
Total retail non-fuel base revenues (2) (3)												112,733			111,987			746			0.7
Wholesale:
Sales for resale - full requirement customer	546			476			70			14.7
Sales for resale - full requirements customer												442			546			(104		)	(19.0	)
Total non-fuel base revenues	112,533			111,347			1,186			1.1		113,175			112,533			642			0.6
Fuel revenues:
Recovered from customers during the period	28,545			39,944			(11,399		)	(28.5	)	25,268			28,545			(3,277		)	(11.5	)
Over collection of fuel ~~(2)~~	(12,758		)	(7,950		)	(4,808		)	(60.5	)	(7,744		)	(12,758		)	5,014			39.3
Total fuel revenues (3)(4)	15,787			31,994			(16,207		)	(50.7	)
Off-system sales (4)(5)	34,979			23,055			11,924			51.7
Total fuel revenues (4)												17,524			15,787			1,737			11.0
Off-system sales (5) (6)												17,971			34,979			(17,008		)	(48.6	)
Wheeling revenues ~~(6)~~(7)	6,005			4,286			1,719			40.1		5,079			6,005			(926		)	(15.4	)
Energy efficiency cost recovery	2,508			1,916			592			30.9		2,343			2,508			(165		)	(6.6	)
Miscellaneous ~~(6)~~(7)	2,010			2,459			(449		)	(18.3	)	1,804			2,010			(206		)	(10.2	)
Total revenues from customers	173,822			175,057			(1,235		)	(0.7	)	157,896			173,822			(15,926		)	(9.2	)
Other (6)	541			656			(115		)	(17.5	)
Other (7) (8)												667			541			126			23.3
Total operating revenues	$	174,363		$	175,713		$	(1,350	)	(0.8	)	$	158,563		$	174,363		$	(15,800	)	(9.1	)
Average number of retail customers (7):
Average number of retail customers (9):
Residential	377,396			371,351			6,045			1.6	%	383,958			377,396			6,562			1.7	%
Commercial and industrial, small	42,222			42,205			17			—		43,212			42,222			990			2.3
Commercial and industrial, large	48			48			—			—		48			48			—			—
Sales to public authorities	6,204			5,592			612			10.9		6,659			6,204			455			7.3
Total	425,870			419,196			6,674			1.6		433,877			425,870			8,007			1.9

________________________________________


(1)	~~2019~~Decrease in commercial and ~~2018 include $5.1 million and $4.1 million, respectively, base rate decreases related~~industrial large is primarily due to ~~the reduction~~reduced demand by a customer during their facility upgrade over a five week period completed in ~~federal statutory income tax rate enacted under the TCJA.~~February 2020.


(2)	~~2018~~2020 includes ~~the portion of the DOE refunds~~a $1.7 million base rate increase related to ~~spent fuel storage of $1.1 million that was credited~~the DCRF settlement agreement approved in PUCT Docket No. 49395 on September 27, 2019, applicable to ~~customers through the applicable fuel adjustment clauses.~~customer billings issued on or after October 1, 2019.


(3)	2020 includes a $1.8 million base rate increase related to the TCRF settlement agreement approved in PUCT Docket No. 49148 on December 16, 2019, applicable to customer billings issued on or after January 1, 2020.


(4)	Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $1.4 million and $1.9 million in 2020 and ~~$2.4 million in~~ 2019, ~~and 2018,~~ respectively.


~~(4)~~	~~Off-system sales increased due to favorable market conditions and lower gas prices, which resulted in increased margins credited to customers through the fuel adjustment clause.~~


(5)	~~Includes retained margins of $0.9 million and $0.6 million~~Off-system sales decreased due to lower average market prices, partially offset by an increase in ~~2019 and 2018, respectively.~~


~~(6)~~	~~Represents revenue with no related kWh~~MWh sales.


~~(7)~~	~~The number of retail customers presented is based on the number of service locations.~~

Comparisons of kWh sales and operating revenues are shown below (in thousands):
Increase (Decrease)
Twelve Months Ended March 31: 2019 2018 Amount Percent
kWh sales:
Retail:
Residential 3,003,221
2,837,694
165,527
5.8 %
Commercial and industrial, small 2,429,612
2,408,795
20,817
0.9
Commercial and industrial, large 1,054,605
1,040,606
13,999
1.3
Sales to public authorities 1,566,845
1,557,436
9,409
0.6
Total retail sales 8,054,283
7,844,531
209,752
2.7
Wholesale:
Sales for resale - full requirement customer 59,031
63,696
(4,665 ) (7.3 )
Off-system sales 2,660,907
2,310,338
350,569
15.2
Total wholesale sales 2,719,938
2,374,034
345,904
14.6
Total kWh sales 10,774,221
10,218,565
555,656
5.4
Operating revenues:
Non-fuel base revenues:
Retail:
Residential $ 298,757
$ 289,866
$ 8,891
3.1 %
Commercial and industrial, small 194,048
198,311
(4,263 ) (2.1 )
Commercial and industrial, large 35,040
37,629
(2,589 ) (6.9 )
Sales to public authorities 95,589
97,496
(1,907 ) (2.0 )
Total retail non-fuel base revenues (1)(2) 623,434
623,302
132
—
Wholesale:
Sales for resale - full requirement customer 2,850
2,743
107
3.9
Total non-fuel base revenues 626,284
626,045
239
—
Fuel revenues:
Recovered from customers during the period 145,094
210,704
(65,610 ) (31.1 )
Over collection of fuel (3) (9,544 ) (16,553 ) 7,009
42.3
Total fuel revenues (4)(5) 135,550
194,151
(58,601 ) (30.2 )
Off-system sales (6) 98,342
67,841
30,501
45.0
Wheeling revenues (7) 20,745
18,133
2,612
14.4
Energy efficiency cost recovery (8) 9,480
1,916
7,564
—
Miscellaneous (7) 7,739
8,836
(1,097 ) (12.4 )
Total revenues from customers 898,140
916,922
(18,782 ) (2.0 )
Other (7)(9) 4,113
4,253
(140 ) (3.3 )
Total operating revenues $ 902,253
$ 921,175
$ (18,922 ) (2.1 )
Average number of retail customers (10):
Residential 375,649
369,554
6,095
1.6 %
Commercial and industrial, small 42,354
42,010
344
0.8
Commercial and industrial, large 48
48
—
—
Sales to public authorities 5,898
5,571
327
5.9
Total 423,949
417,183
6,766
1.6


~~(1)~~	~~2019 and 2018 include base rate increase related to the 2017 PUCT Final Order effective July 18, 2017.~~


~~(2)~~	2019 and 2018 include $29.2 million and $4.9 million (for the period January 1, 2018 through March 31, 2018), respectively, base rate decreases related to the reduction in federal statutory income tax rate enacted under the TCJA.


~~(3)~~	~~2018 includes the portion of the DOE refunds related to spent fuel storage of $1.1 million that was credited to customers through the applicable fuel adjustment clauses.~~


~~(4)~~	~~2018 includes $5.0 million related to the Palo Verde performance rewards, net.~~


~~(5)~~	~~Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $7.6 million and $9.4 million in 2019 and 2018, respectively.~~


(6)	Includes retained margins of ~~$2.4~~$0.7 million and ~~$1.8~~$0.9 million in ~~2019~~2020 and ~~2018,~~2019, respectively.


(7)	Represents revenue with no related kWh sales.


(8)	~~The Company implemented ASU 2014-09, Revenue from Contracts with Customers, January 1, 2018, and following the adoption of the standard, revenues related to reimbursed costs of~~Includes an energy efficiency ~~programs approved by the Company's regulators are reported~~bonus of $0.1 million in ~~operating revenues from customers. Related expenses are reported in O&M expenses.~~2020.


(9)	~~Includes energy efficiency bonuses of $1.3 million and $1.2 million in 2019 and 2018, respectively.~~


~~(10)~~	The number of retail customers presented is based on the number of service locations.



Comparisons of kWh sales and operating revenues are shown below (in thousands):
							Increase (Decrease)
Twelve Months Ended March 31,	2020			2019			Amount			Percent
kWh sales:
Retail:
Residential	2,998,511			3,003,221			(4,710		)	(0.2	)%
Commercial and industrial, small	2,396,666			2,429,612			(32,946		)	(1.4	)
Commercial and industrial, large (1)	1,007,782			1,054,605			(46,823		)	(4.4	)
Sales to public authorities	1,567,660			1,566,845			815			0.1
Total retail sales	7,970,619			8,054,283			(83,664		)	(1.0	)
Wholesale:
Sales for resale - full requirements customer	61,326			59,031			2,295			3.9
Off-system sales	2,997,796			2,660,907			336,889			12.7
Total wholesale sales	3,059,122			2,719,938			339,184			12.5
Total kWh sales	11,029,741			10,774,221			255,520			2.4
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	304,118		$	298,757		$	5,361		1.8	%
Commercial and industrial, small	196,285			194,048			2,237			1.2
Commercial and industrial, large (1)	34,890			35,040			(150		)	(0.4	)
Sales to public authorities	97,324			95,589			1,735			1.8
Total retail non-fuel base revenues (2) (3) (4)	632,617			623,434			9,183			1.5
Wholesale:
Sales for resale - full requirements customer	2,738			2,850			(112		)	(3.9	)
Total non-fuel base revenues	635,355			626,284			9,071			1.4
Fuel revenues:
Recovered from customers during the period	118,184			145,094			(26,910		)	(18.5	)
Over collection of fuel (5)	(22,156		)	(9,544		)	(12,612		)	—
Total fuel revenues (6)	96,028			135,550			(39,522		)	(29.2	)
Off-system sales (7) (8)	71,335			98,342			(27,007		)	(27.5	)
Wheeling revenues (9)	21,695			20,745			950			4.6
Energy efficiency cost recovery	9,293			9,480			(187		)	(2.0	)
Miscellaneous (9)	7,895			7,739			156			2.0
Total revenues from customers	841,601			898,140			(56,539		)	(6.3	)
Other (9) (10)	4,593			4,113			480			11.7
Total operating revenues	$	846,194		$	902,253		$	(56,059	)	(6.2	)
Average number of retail customers (11):
Residential	381,796			375,649			6,147			1.6	%
Commercial and industrial, small	42,932			42,354			578			1.4
Commercial and industrial, large	48			48			—			—
Sales to public authorities	6,416			5,898			518			8.8
Total	431,192			423,949			7,243			1.7


(1)	Decrease in commercial and industrial large is primarily due to reduced demand by a customer during their facility upgrade over a five week period completed in February 2020.


(2)	2020 includes a $3.6 million base rate increase related to the DCRF settlement agreement approved in PUCT Docket No. 49395 on September 27, 2019, applicable to customer billings issued on or after October 1, 2019.


(3)	2020 includes a $4.8 million base rate increase related to the TCRF settlement agreement approved in PUCT Docket No. 49148 on December 16, 2019.


(4)	2020 and 2019 include $4.8 million and $2.0 million, respectively, related to the 1% increase in the City of El Paso franchise fee on gross

revenues for services within the City of El Paso, applicable to customer billings issued on or after October 1, 2018.


(5)	2020 includes the portion of the DOE refunds related to spent fuel storage of $1.0 million, that was credited to customers through the applicable fuel adjustment clauses.


(6)	Includes deregulated Palo Verde Unit 3 revenues for the New Mexico jurisdiction of $4.8 million and $7.6 million in 2020 and 2019, respectively.


(7)	Off-system sales decreased due to lower average market prices, partially offset by an increase in MWh sales.


(8)	Includes retained margins of $2.4 million in 2020 and 2019.


(9)	Represents revenue with no related kWh sales.


(10)	Includes energy efficiency bonuses of $1.7 million and $1.3 million in 2020 and 2019, respectively.


(11)	The number of retail customers presented is based on the number of service locations.

Fuel and purchased power expense

Our sources of energy include electricity generated from our nuclear and natural gas generating plants and purchased power. Palo Verde represents approximately 30% of our net dependable generating capacity and approximately ~~60%~~57% and ~~50%~~49% of our Company-generated energy for the three and twelve months ended March 31, ~~2019,~~2020, respectively. Fluctuations in the price of natural gas, which also is the primary factor influencing the price of purchased power, have had a significant impact on our cost of energy.

Fuel and purchased power expense decreased ~~$3.9~~$14.7 million, or ~~7.4%~~30.4%, for the three months ended March 31, ~~2019~~2020 compared to the three months ended March 31, ~~2018,~~2019, primarily due to ~~a decrease in~~(i) decreased natural gas costs of ~~$8.9~~$9.4 million primarily due to a ~~23.1%~~45.5% decrease in the average cost of ~~megawatt-hours ("MWhs")~~MWhs generated, ~~and~~partially offset by a ~~7.1% decrease~~5.9% increase in MWhs generated with natural ~~gas. This decrease was partially offset by (i) increased~~gas and (ii) decreased total purchased power costs of ~~$3.8~~$5.2 million primarily due to a ~~20.2%~~36.0% decrease in the average cost of MWhs purchased.



	Three Months Ended March 31,
	2020					2019
Fuel Type	Cost		MWh	Cost per MWh		Cost		MWh	Cost per MWh
	(in thousands)					(in thousands)
Natural gas	$	12,849	969,987	$	13.25	$	22,279	915,521	$	24.33
Coal (a)	165		—	—		165		—	—
Nuclear	10,843		1,288,399	8.42		10,919		1,364,307	8.00
Total	23,857		2,258,386	10.56		33,363		2,279,828	14.63
Purchased power:
Photovoltaic	4,623		57,656	80.18		4,793		58,768	81.56
Other	5,144		272,930	18.85		10,170		265,303	38.33
Total purchased power	9,767		330,586	29.54		14,963		324,071	46.17
Total fuel and purchased power	$	33,624	2,588,972	12.99		$	48,326	2,603,899	18.56

_________

(a) Costs related to amortization of deferred coal mine reclamation obligations.

Fuel and purchased power expense decreased $64.0 million, or 28.4%, for the twelve months ended March 31, 2020 compared to the twelve months ended March 31, 2019, primarily due to (i) decreased natural gas costs of $51.5 million primarily due to a 45.9% decrease in the average cost of MWhs generated, partially offset by a 6.0% increase in the MWhs generated with natural gas and (ii) decreased total purchased power costs of $13.3 million primarily due to a 18.0% decrease in the average cost of MWhs purchased and a ~~11.8% increase~~3.5% decrease in ~~the~~ MWhs ~~purchased and (ii) increased nuclear costs of $1.2 million primarily due to a $1.2 million DOE refund received in 2018 with no comparable activity in 2019.~~purchased.



	Twelve Months Ended March 31,
	2020							2019
Fuel Type	Cost			MWh	Cost per MWh			Cost		MWh	Cost per MWh
	(in thousands)							(in thousands)
Natural gas	$	69,182		5,255,791	$	13.16		$	120,717	4,960,277	$	24.34
Coal (a)	661			—	—			661		—	—
Nuclear	41,109		(b)	4,968,486	8.49		(b)	40,293		4,931,658	8.17
Total	110,952			10,224,277	10.96			161,671		9,891,935	16.34
Purchased power:
Photovoltaic	22,874			281,277	81.32			21,997		272,767	80.64
Other	27,393			1,058,987	25.87			41,579		1,116,799	37.23
Total purchased power	50,267			1,340,264	37.51			63,576		1,389,566	45.75
Total fuel and purchased power	$	161,219		11,564,541	14.03			$	225,247	11,281,501	19.97

Three Months Ended March 31,
2019 2018
Fuel Type Cost MWh
Cost per
MWh
Cost MWh
Cost per
MWh
(in thousands) (in thousands)
Natural gas $ 22,279
915,521
$ 24.33
$ 31,145
985,107
$ 31.62
Coal (a) 165
—
—
165
—
—
Nuclear 10,919
1,364,307
8.00
9,744
(b) 1,346,507
8.12
Total 33,363
2,279,828
14.63
41,054
2,331,614
18.12
Purchased power:
Photovoltaic 4,793
58,768
81.56
5,024
61,570
81.60
Other 10,170
265,303
38.33
6,110
228,244
26.77
Total purchased power 14,963
324,071
46.17
11,134
289,814
38.42
Total fuel and purchased power $ 48,326
2,603,899
18.56
$ 52,188
2,621,428
20.36

~~____________________~~_________

(a) Costs related to amortization of deferred coal mine reclamation obligations.

(b) Cost includes a DOE refund related to spent fuel storage of ~~$1.2~~$1.1 million recorded in ~~March 2018. Cost per MWh excludes this refund.~~

Fuel and purchased power expense decreased $21.4 million, or 8.7%, for the twelve months ended March 31, 2019 compared to the twelve months ended March 31, 2018, primarily due to (i) decreased natural gas costs of $26.5 million primarily due to a 29.7% decrease in the average cost of MWhs generated, partially offset by a 16.6% increase in the MWhs generated with natural gas, (ii) decreased nuclear costs of $1.4 million primarily due to a reduction in the price of uranium and a 3.2% decrease in the MWhs generated with nuclear fuel, offset by a $1.2 million DOE refund received in 2018 with no comparable activity in 2019, and (iii) increased total purchased power costs of $6.4 million primarily due to a 12.3% increase in the average cost of MWhs purchased.

Twelve Months Ended March 31,
2019 2018
Fuel Type Cost MWh
Cost per
MWh
Cost MWh
Cost per
MWh
(in thousands) (in thousands)
Natural gas $ 120,717
4,960,277
$ 24.34
$ 147,266
4,255,832
$ 34.60
Coal (a) 661
—
—
532
—
—
Nuclear 40,293
4,931,658
8.17
41,719
(b) 5,092,305
8.43
Total 161,671
9,891,935
16.34
189,517
9,348,137
20.40
Purchased power:
Photovoltaic 21,997
272,767
80.64
23,510
288,992
81.35
Other 41,579
1,116,799
37.23
33,633
1,113,553
30.20
Total purchased power 63,576
1,389,566
45.75
57,143
1,402,545
40.74
Total fuel and purchased power $ 225,247
11,281,501
19.97
$ 246,660
10,750,682
23.05

~~_____________~~

~~(a) Costs related to amortization of deferred coal mine reclamation obligations.~~

~~(b) Cost includes a DOE refund related to spent fuel storage of $1.2 million recorded in March 2018.~~June 2019. Cost per MWh excludes this refund.

Operations and maintenance expense

Operations and maintenance expense increased $0.3 million, or ~~0.3%~~0.4%, for the three months ended March 31, ~~2019,~~2020, compared to the three months ended March 31, ~~2018,~~2019, primarily due to increases of (i) ~~$1.0~~$3.0 million in ~~transmission~~maintenance costs at Newman, (ii) $0.9 million in outage costs at Newman Unit 5, and ~~distribution expenses and (ii) $0.6 million due to the timing of energy efficiency program costs. These increases were partially offset by decreases of (i) $0.8~~(iii) $0.7 million in A&G expense primarily due to changes in actuarial assumptions used to calculate expenses for retirement benefit plans, including a decrease in the discount rate. These increases were partially offset by decreases of $2.2 million in outage costs at Newman Unit 4 and ~~decreases in costs for employee benefits and (ii) $0.8~~$1.7 million in O&M expenses at Palo Verde.

Operations and maintenance expense ~~increased $13.9~~decreased $2.3 million, or ~~4.3%~~0.7%, for the twelve months ended March 31, ~~2019,~~2020, compared to the twelve months ended March 31, ~~2018,~~2019, primarily due to ~~increases~~decreases of (i) ~~$7.6~~$3.0 million ~~primarily~~in O&M expenses at Newman due to ~~energy efficiency program costs previously offset by the related revenues prior to the adoption of ASU 2014-09, (ii) $6.6 million in~~decreased outage costs at Newman Units 1, 2, and 4, ~~(iii) $4.9~~partially offset by increases in maintenance costs and outage costs at Newman Unit 5, and (ii) $1.8 million in ~~increased~~O&M expenses at Palo Verde. These decreases were partially offset by increases of (i) $0.8 million in maintenance costs at ~~Newman and Montana, (iv) $3.0~~Rio Grande, (ii) $0.7 million in transmission and distribution expense, ~~primarily due to increases in payroll costs~~ and ~~Palo Verde transmission expenses due to storm repairs, and (v) $0.8~~(iii) $0.7 million in Four Corners operating expenses due to post-closing purchase price adjustments recorded in the twelve months ended March 31, 2018. These increases were partially offset by decreases of (i) $4.3 million in O&M expenses at Palo Verde and (ii) $3.1 million in outage costs at Rio Grande Unit 8.

A&G expense.

Depreciation and amortization expense

Depreciation and amortization expense increased $1.3 million, or ~~5.5%~~5.3%, and ~~$5.0~~$5.7 million, or ~~5.4%~~5.9%, for the three and twelve months ended March 31, ~~2019,~~2020, compared to the three and twelve months ended March 31, ~~2018, primarily~~2019, due to increased plant balances.

Taxes other than income taxes

Taxes other than income taxes ~~increased $0.7~~decreased $0.1 million, or ~~4.4%~~0.7%, for the three months ended March 31, ~~2019,~~2020, compared to the three months ended March 31, ~~2018,~~2019, primarily due to ~~increased~~decreased revenue related taxes in Texas, partially offset by increases in payroll taxes and property ~~valuations and~~ tax ~~rates~~valuations in Texas.

Taxes other than income taxes increased ~~$1.0~~$1.6 million, or ~~1.5%~~2.2%, for the twelve months ended March 31, ~~2019,~~2020, compared to the twelve months ended March 31, ~~2018,~~2019, primarily due to increased property tax valuations and tax rates, ~~in Texas, partially offset by decreased~~and increased revenue related taxes in Texas.

Other income (deductions)

Other income (deductions) ~~increased $18.9~~decreased $51.9 million, or ~~292.7%~~204.4%, for the three months ended March 31, ~~2019~~2020, compared to the three months ended March 31, ~~2018, primarily due to a $18.5 million increase in net realized and unrealized gains on securities held in the NDT.~~

~~Other income (deductions) increased $2.9 million, or 7.6%, for the twelve months ended March 31,~~ 2019, ~~compared to the twelve months ended March 31, 2018,~~ primarily due to (i) a $1.8 million increase in the expected return on benefit plan assets, (ii) a $0.5 million increase in dividends and interest income in the NDT, and (iii) a $0.4 million increase in allowance for equity funds used during construction ("AEFUDC") due to increased amounts of CWIP subject to AEFUDC and to an increase in rate. These increases were partially offset by a $0.4$49.2 million decrease in realized and unrealized net gains on securities held in the ~~NDT.~~NDT and (ii) $1.3 million of strategic transaction costs in the three months ended March 31, 2020, with no comparable costs in the three months ended March 31, 2019.

Other income (deductions) decreased $28.1 million, or 67.6%, for the twelve months ended March 31, 2020, compared to the twelve months ended March 31, 2019, primarily due to (i) a $16.2 million decrease in realized and unrealized net gains on securities held in the NDT and (ii) $13.4 million of strategic transaction costs in the twelve months ended March 31, 2020, with no comparable costs in the twelve months ended March 31, 2019.

Beginning on January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments, and began recording unrealized gains and losses on equity securities held in the NDT directly in earnings. Further details are shown below (in thousands):


													Three Months Ended						Twelve Months Ended
	Three Months Ended March 31,						Twelve Months Ended March 31,						March 31,						March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Allowance for equity funds used during construction	$	1,001		$	920		$	3,534		$	3,130		$	586		$	1,001		$	2,130		$	3,534
Investment and interest income, net:
NDT unrealized gains (losses), net	16,690			(3,781		)	1,870			(3,781		)	(33,188		)	16,690			(14,026		)	1,870
NDT realized gains (losses), net	(701		)	1,272			3,661			9,707			24			(701		)	3,387			3,661
NDT dividends and interest income	1,788			1,678			7,337			6,806			1,242			1,788			6,977			7,337
Expected returns on benefit plans (ASU 2017-07)	5,913			5,928			23,496			21,746			6,303			5,913			24,002			23,496
Other	17			58			565			267			20			17			(19		)	565
	23,707			5,155			36,929			34,745			(25,599		)	23,707			20,321			36,929
Miscellaneous non-operating income	3,048			3,136			12,735			12,292			2,945			3,048			15,166			12,735
Strategic transaction costs													(1,295		)	—			(13,405		)	—
Miscellaneous non-operating deductions	(2,357		)	(2,743		)	(11,594		)	(11,494		)	(3,149		)	(2,357		)	(10,738		)	(11,594		)
Total other income (deductions)	$	25,399		$	6,468		$	41,604		$	38,673		$	(26,512	)	$	25,399		$	13,474		$	41,604

Interest charges (credits)

Interest charges (credits) ~~increased~~decreased by ~~$1.2~~$0.7 million, or ~~5.8%~~3.2%, for the three months ended March 31, ~~2019,~~2020, compared to the three months ended March 31, ~~2018,~~2019, primarily due to a decrease in the interest cost component of net periodic benefit cost of the Company's benefit plans, and the purchase in lieu of redemption of $37.1 million aggregate principal amount of 2009 Series B 7.25% PCBs on April 1, 2019, and the subsequent reoffering and sale of the PCBs on May 22, 2019 at the stated interest rate of 3.60% per annum. These decreases were partially offset by the purchase in lieu of redemption of $63.5 million aggregate principal amount of 2009 Series A 7.25% PCBs on February 1, 2019.

Interest charges (credits) increased by $0.3 million, or 0.4%, for the twelve months ended March 31, 2020, compared to the twelve months ended March 31, 2019, primarily due to (i) additional borrowings under the RCF, (ii) interest expense on the $125.0 million aggregate principal amount of 4.22% Senior Notes due 2028 issued in June 2018, and (iii) an increase in the interest cost component of net periodic benefit cost of the Company's employee benefit plans. These increases were partially offset by the purchase in lieu of redemption of $63.5 million ~~principal amount of 2009 Series A 7.25% PCBs on February 1, 2019.~~

Interest charges (credits) increased by $2.4 million, or 2.8%, for the twelve months ended March 31, 2019, compared to the twelve months ended March 31, 2018, primarily due to interest expense on the $125.0 million aggregate ~~principal amount of 4.22% Senior Notes due 2028 issued in June 2018. This increase was partially offset by (i) the purchase in lieu of redemption of $63.5 million~~ principal amount of 2009 Series A 7.25% PCBs on February 1, 2019 ~~(ii) increased allowance for ABFUDC as a result of higher average balances of CWIP~~ and ~~an increase in the ABFUDC rate, and (iii) the redemption of $33.3~~$37.1 million aggregate principal amount of ~~2012~~2009 Series ~~A 1.875%~~B 7.25% PCBs ~~in 2017.~~on April 1, 2019, and the subsequent reoffering and sale of the PCBs on May 22, 2019 at the stated interest rate of 3.60% per annum.

Income tax expense

Income tax expense increased $5.0 million, or 162.3%, for the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to an increase in pre-tax income, lower values of stock incentives vested and other permanent differences. (benefit)

Income tax expense decreased ~~$18.9~~$12.5 million, or ~~37.7%~~659.3%, and $9.8 million, or 31.4%, for the three and twelve months ended March 31, 2020, compared to the three and twelve months ended March 31, 2019, ~~compared to the twelve months ended March 31, 2018,~~primarily due to ~~the change in the federal income tax rate and~~ a decrease in pre-tax income and other permanent differences, partially offset by ~~an increase in~~increased state ~~tax reserves and other permanent differences.~~income taxes.

New Accounting Standards

See Part I, Item 1, Financial Statements, Note A of Notes to Financial Statements for a discussion of new accounting standards adopted in 2020 and to be adopted in the future.

Inflation

For the last several years, inflation has been relatively low and, therefore, has had minimal impact on our results of operations and financial condition.

Liquidity and Capital Resources

At March 31, ~~2019,~~2020, our capital structure, including common stock ~~long-term debt, current maturities of~~equity, long-term debt, and short-term borrowings under our RCF, consisted of ~~43.1%~~41.7% common stock equity and ~~56.9%~~58.3% debt. As of March 31, ~~2019,~~2020, we had a balance of ~~$8.5~~$57.4 million in cash and cash ~~equivalents~~equivalents. As a precautionary measure in response to the growing COVID-19 pandemic and ~~$38.4~~potential economic turmoil, on March 13, 2020, we borrowed $50.0 million ~~in restricted~~under our RCF to increase our cash position, and maintain financial flexibility. Additionally, on March 20, 2020, we increased the borrowing commitments under our RCF by $50.0 million to ~~purchase in lieu of redemption all of the 2009 Series B 7.25% PCBs.~~$400.0 million, which increased our total available liquidity to $159.0 million at March 31, 2020. Based on current projections, we believe that we will have adequate liquidity through our current cash balances, cash from operations, available borrowings under the RCF and, if necessary, debt ~~or equity~~ issuances in the capital markets or, after the closing of the Merger, an equity contribution from the Parent, to meet all of our anticipated cash requirements ~~over~~for the next twelve ~~months.~~

~~Our~~months including the maturity of $45.0 million aggregate principal ~~liquidity requirements in the near-term are expected to consist~~amount of ~~capital expenditures to expand and support electric service obligations, expenditures for nuclear fuel inventory, interest payments on~~ our ~~indebtedness, cash dividend payments, operating expenses including fuel costs, maintenance costs and taxes.~~

~~Capital Requirements. During the three months ended March 31, 2019, our primary capital requirements were related~~Series C 5.04% Senior Notes due August 2020. Pursuant to the ~~construction and purchase of electric utility plant, payment of common stock dividends and purchases of nuclear fuel. Capital expenditures for new electric utility plant were $52.4~~Merger Agreement, we can incur additional indebtedness up to $200.0 million in(excluding borrowings up to the three months ended March 31, 2019, compared to $66.9 million in the three months ended March 31, 2018. Capital expenditures for 2019 are expected to be approximately $249 million. Capital requirements for purchases of nuclear fuel were $9.5 million in the three months ended March 31, 2019 compared to $9.3 million in the three months ended March 31, 2018.

~~On March 29, 2019, we paid a quarterly cash dividend of $0.36 per share, or $14.7 million, to shareholders of record as~~borrowing capacity of the ~~close~~RCF) prior to the closing of ~~business on March 15, 2019. We expect to continue paying quarterly cash dividends in 2019. We expect our board of directors to conduct its annual review of our dividend policy in~~ the ~~second quarter of 2019. In addition, while~~Merger, without written consent from the Parent; however, we do not currently anticipate repurchasing shares of our common stock in 2019, we are authorized to repurchase shares of our common stock in the future. Under our repurchase program, purchases can be made at open market prices or in private transactions, and repurchased shares are available for issuance under employee benefit and stock incentive plans, or may be retired. Nocannot issue shares of common stock, ~~were repurchased during~~subject to certain limited exceptions, without the ~~three months ended March 31, 2019.~~prior written consent of Parent. As ~~of March 31, 2019, a total of 393,816 shares remain eligible for repurchase under~~discussed below, we have the ~~repurchase program.~~necessary regulatory approvals to issue long-term debt and equity in the capital markets.

We expect to continue to maintain a prudent level of liquidity and monitor market conditions for debt and equity securities. Our liquidity needs can fluctuate quickly based on fuel prices and other factors and we are continuing to make investments in new electric plant and other assets in order to reliably serve our customers.

We believe we have adequate liquidity to meet our capital requirements over the next twelve months; however, the duration (which remains uncertain) and severity of the COVID-19 pandemic could extend disruptions to supply chains and capital markets, reduce labor availability and productivity, and cause a reduction in economic activity despite our efforts to manage these impacts.

Our principal liquidity requirements in the near-term are expected to consist of capital expenditures to expand and support electric service obligations, expenditures for nuclear fuel inventory, interest payments on our indebtedness, cash dividend payments, operating expenses including fuel costs, maintenance costs, taxes, and strategic transaction costs related to the Merger.

Capital Requirements. During the three months ended March 31, 2020, our primary capital requirements were related to the construction and purchase of electric utility plant, payment of common stock dividends and purchases of nuclear fuel. Capital expenditures for new electric utility plant were $50.9 million in the three months ended March 31, 2020, compared to $52.4 million in the three months ended March 31, 2019. Capital expenditures for 2020 are expected to be approximately $235.0 million. Capital requirements for purchases of nuclear fuel were $12.6 million in the three months ended March 31, 2020, compared to $9.5 million in the three months ended March 31, 2019.

On March 31, 2020, we paid a quarterly cash dividend of $0.385 per share, or $15.7 million, to shareholders of record as of the close of business on March 17, 2020. Under the Merger Agreement, we are allowed to declare and pay to our shareholders any dividends declared by our Board of Directors prior to the completion of the Merger, including a "stub period" dividend with respect to the period between the record date of the last regular quarterly dividend paid by us, and the closing date of the Merger. We may not declare or pay dividends or distributions on shares of common stock in an amount in excess of $0.385 per share for quarterly dividends declared before June 1, 2020, and $0.41 per share for quarterly dividends declared on or after June 1, 2020.

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.~~

~~The TCJA discontinued bonus depreciation~~Income tax payments in 2020 are expected to be approximately $20.0 million for ~~regulated utilities which reduced~~federal and state income taxes, as compared to minimal income tax ~~deductions previously available~~payments in 2019 primarily due to ~~us for 2019~~. ~~The decrease in tax deductions results in~~ the utilization of our net operating loss carryforwards ~~("NOL carryforwards")~~ and ~~other carryforwards approximately one year earlier than previously anticipated and is expected to result in higher income~~ tax ~~payments beginning in 2020, after the full utilization of NOL and other~~credit carryforwards. However, due to the lower federal corporate income tax rate enacted by the TCJA, our future federal corporate income tax payments will be made at the reduced rate of 21%. Due to NOL carryforwards, minimal tax payments are expected for 2019, which are mostly related to state income taxes.

The effect of the TCJA on our rates is beneficial to our customers. Following the enactment of the TCJA and the reduction of the federal corporate income tax rate, revenues collected from our customers in 2018 were reduced by $28.2 million, which negatively impacted our cash flows. A comparable amount is expected during 2019.

We continually evaluate our funding requirements related to our retirement plans, other post-retirement benefit plans and the NDT. During the three months ended March 31, ~~2019,~~2020, we contributed ~~$3.0~~$2.9 million and $0.2 million to our retirement plans and other post-retirement benefits plan, respectively, and $0.5 million to the NDT. We are in compliance with the funding requirements of the federal government for our benefit plans. In addition, with respect to our nuclear plant decommissioning trust, we are in compliance with the funding requirements of the federal law and the ANPP Participation Agreement. Despite the volatility in the capital markets resulting from the COVID-19 pandemic, we currently do not anticipate additional funding requirements beyond planned contributions for the year. We will continue to review our funding for these plans in order to meet our future obligations.

Capital Resources. Cash (used for) or provided by operations was $(1.5) million for the three months ended March 31, 2020 and $26.4 million for the three months ended March 31, ~~2019 and $26.2 million for the three months ended March 31, 2018,~~2019. Generally, cash provided by operations is a significant source for funding capital requirements. 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)~~(over-

recoveries) or surcharged (under-recoveries) to customers in the future. During the three months ended March 31, ~~2019,~~2020, we had fuel ~~over-recoveries~~under-recoveries of ~~$12.8~~$6.2 million compared to over-recoveries of fuel costs of ~~$8.0~~$12.8 million during the three months ended March 31, ~~2018.~~2019. At March 31, ~~2019,~~2020, we had a net fuel ~~over-~~

~~recovery~~over-recovery balance of ~~$23.8~~$12.2 million, including over-recoveries of ~~$19.3~~$8.8 million in our Texas, ~~$4.4~~$3.3 million in our New Mexico and $0.1 million in our FERC jurisdictions. On ~~October 15, 2018,~~September 13, 2019, we filed a request with the PUCT, which was assigned PUCT Docket No. 49960, to decrease our Texas fixed fuel factor by approximately ~~6.99%~~12.2% to reflect decreased fuel expenses primarily related to a decrease in the price of natural gas used to generate power. On ~~October~~September 25, ~~2018, the Company's~~2019, our fixed fuel factor was approved by the PUCT on an interim basis effective for the first billing cycle of the ~~November 2018~~October 2019 billing month. ~~The revised factor was approved by the PUCT and the docket closed on November 19, 2018.~~ The Texas fixed fuel factor was determined to be final on October 15, 2019, and will continue ~~thereafter~~ until changed by the PUCT. On ~~April 29,~~November 26, 2019, ~~the Company~~we filed a petition with the PUCT, which was assigned PUCT Docket No. ~~49482,~~50292, requesting authority to implement, beginning on ~~June~~January 1, ~~2019,~~2020, a ~~four-month~~three-month, interim fuel refund of ~~$19.4~~$15.0 million in fuel cost over-recoveries for the period from April 2019 through October 2019, including interest for the period from April ~~2016~~2019 through March ~~2019. The Company cannot predict~~2020. On December 12, 2019, our fuel refund credit was approved on an interim basis. We implemented the ~~outcome of this filing at this time.~~fuel refund in customer bills beginning January 1, 2020, and completed the refund period on March 31, 2020, during which $14.0 million was refunded.

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. We received additional approval from the NMPRC on October 4, 2017, to amend and extend the RCF, increase the commitments under the RCF by up to $450.0 million, issue up to $350.0 million in long-term debt and to redeem and refinance the $63.5 million aggregate principal amount of 2009 Series A 7.25% PCBs and the $37.1 million 2009 Series B 7.25% PCBs, which are subject to optional redemption in 2019. The NMPRC approval to issue up to $350.0 million in long-term debt supersedes its prior approval. We received approval from the FERC on October 31, 2017, to issue up to $350.0 million in long-term debt, 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, and to redeem, refinance and/or replace the 2009 Series A 7.25% PCBs and 2009 Series B 7.25% PCBs with debt of equal face value. The authorization approved by the FERC is effective from November 15, 2017 through November 14, 2019, and supersedes its prior approvals.

~~Under these authorizations, on June 28, 2018, the Company issued $125.0 million in~~ aggregate principal amount of 4.22% Senior Notes due August 15, 2028, and guaranteed the issuance by the RGRT of $65.0 million in aggregate principal amount of 4.07% Senior Guaranteed Notes due August 15, 2025. The net proceeds from the sale of these senior notes were used to repay outstanding short-term borrowings under the RCF, which included borrowings made for working capital, general corporate purposes and the purchase of nuclear fuel. Also, under these authorizations, on September 13, 2018, the Company and RGRT entered into a third amended and restated credit agreement where we have available a $350.0 million RCF with a term ending on September 13, 2023. We may increase the RCF by up to $50.0 million (to a total of $400.0 million) during the term of the RCF, upon the satisfaction of certain conditions more fully set forth in the agreement, including obtaining commitments from lenders or third party financial institutions. In addition, we may extend the maturity date of the RCF up to two times, in each case for an additional one-year period upon the satisfaction of certain conditions. Additionally, the Company is preparing for potential transactions related to the 2009 Series A 7.25% PCBs and 2009 Series B 7.25% PCBs. On February 1, 2019, the Company purchased in lieu of redemption all of the 2009 Series A 7.25% PCBs utilizing funds borrowed under the RCF. On April 1, 2019, the Company purchased in lieu of redemption all of the 2009 Series B 7.25% PCBs utilizing funds borrowed under the RCF. The Company is currently holding the PCBs and may remarket them or replace them with debt instruments of equivalent value at a future date depending on the Company's financing needs and market conditions, and in accordance with FERC approval in April 2019 in response to the Company's most recent FERC application (see below).

On March 27, 2019, the NMPRC issued a final order approving ~~the Company's~~our request to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions. On April 18, 2019, ~~the Company~~we received approval from the FERC to issue shares of common stock, including the reissuance of treasury shares, in an amount up to $200.0 million in one or more transactions; to utilize the existing RCF for short-term ~~borrowing~~borrowings not to exceed $400.0 million at any one time; to issue up to $225.0 million in new long-term debt; and to remarket the $63.5 million aggregate principal amount of 2009 Series A 7.25% PCBs and the $37.1 million aggregate principal amount of 2009 Series B 7.25% PCBs in the form of replacement bonds or senior notes of equivalent value, not to exceed $100.6 million. The authorization approved by the FERC is effective from April 18, 2019 through April 18, 2021, and supersedes its prior approvals.

Under these authorizations, on February 1, 2019, we purchased in lieu of redemption all of the 2009 Series A 7.25% PCBs utilizing funds borrowed under the RCF. On April 1, 2019, we purchased in lieu of redemption all of the 2009 Series B 7.25% PCBs utilizing funds borrowed under the RCF. On May 22, 2019, we reoffered and sold $63.5 million aggregate principal amount of 2009 Series A 7.25% PCBs and $37.1 million aggregate principal amount of 2009 Series B 7.25% PCBs with a fixed interest rate of 3.60% per annum until the PCBs mature on February 1, 2040 and April 1, 2040, respectively. The PCBs are subject to optional redemption at a redemption price of par on or after June 1, 2029. Proceeds from the remarketing of the PCBs were primarily used to repay outstanding short-term borrowings under the RCF.

On March 20, 2020, we exercised our option to extend the maturity of the RCF by one year to September 13, 2024 and to increase the borrowing commitments under the RCF by $50.0 million to $400.0 million. We have the option to extend the RCF by one additional year to September 2025 upon the satisfaction of certain conditions set forth in the RCF agreement, including requisite lender approval.

The Merger would constitute a "Change in Control" under the RCF and the consummation of the Merger would result in an event of default under the RCF. On and subject to the terms and conditions of the Merger Agreement, we requested that the lenders under the RCF consent to the Merger and waive any default or event of default that would occur as a result of the Merger. On August 9, 2019, the lenders agreed to such consent and waiver.

We maintain the RCF for working capital and general corporate purposes and financing of nuclear fuel through the RGRT. The RGRT, the trust through which we finance our portion of nuclear fuel for Palo Verde, is consolidated in our financial statements. The total amount borrowed for nuclear fuel by the RGRT, excluding debt issuance costs, was ~~$140.0~~$143.8 million at March 31, ~~2019,~~2020, of which ~~$30.0~~$33.8 million had been borrowed under the RCF, and $110.0 million was borrowed through the issuance of senior notes. Borrowings by the RGRT for nuclear fuel, excluding debt issuance costs, were ~~$134.1~~$140.0 million as of March 31, ~~2018,~~2019, of which ~~$89.1~~$30.0 million had been borrowed under the RCF and ~~$45.0~~$110.0 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. At March 31, ~~2019, $173.0~~2020, $207.0 million was outstanding under the RCF for working capital and general corporate purposes. At March 31, ~~2018, $144.0~~2019, $173.0 million was outstanding under the RCF for working capital and general corporate purposes. Total aggregate borrowings under the $400.0 million RCF at March 31, ~~2019,~~2020, were ~~$203.0~~$240.8 million with an additional ~~$146.9~~$159.0 million available to borrow. The total aggregate borrowings on our RCF of $240.8 million at March 31, 2020, included the additional borrowing of $50.0 million on March 13, 2020, to increase our immediately available liquidity and to preserve our financial flexibility in light of the COVID-19 pandemic and economic turmoil.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk due to changes in interest rates, equity prices and commodity prices. See the ~~2018~~2019 Form 10-K, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," for a complete discussion of the market risks we face and our market risk sensitive assets and liabilities. As of March 31, ~~2019~~2020, there have been no material changes in the market risks we face or the fair values of assets and liabilities disclosed in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in the ~~2018~~2019 Form ~~10-K.~~10-K, except as discussed in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q as it relates to COVID-19.


Item 4.	Controls and Procedures

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation pursuant to Rule 13a-15(b) under the Exchange Act of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our chief executive officer and our chief financial officer concluded that, as of March 31, ~~2019~~2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and such information is accumulated and communicated to management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15, that occurred during the quarter ended March 31, ~~2019~~,2020, that materially affected, or that were reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

We hereby incorporate by reference the information set forth in Part I of this report under Notes D and JI of the Notes to Financial Statements.


Item 1A.	Risk Factors

~~There have been no material changes from~~Please see below the new risk factor affecting the Company, in addition to those discussed in “Risk Factors” in Item 1A of Part I of the 2019 Form 10-K, which could materially affect the Company’s financial condition or future results. In addition, the risk factors disclosed in the 2019 Form 10-K could be affected by the potential effects of the COVID-19 pandemic discussed herein.

We face risks related to COVID-19 and other health epidemics and outbreaks, including economic, regulatory, legal, workforce, and cyber security risks, which could adversely impact our ~~2018 Form 10-K.~~financial condition, results of operations, cash flows and liquidity.

The recent outbreak of COVID-19 is a rapidly evolving situation that is adversely affecting current global economic activities and conditions. An extended slowdown of economic growth, decreased demand for commodities and/or material changes in governmental or regulatory policy in the U.S. could result in lower growth and reduced demand for and usage of electricity in our service territory as facilities continue to close or remain closed. The ability of our customers, contractors and suppliers to meet their obligations to us, including payment obligations, could also be affected under the current economic conditions.

Our state and local regulatory agencies, in response to a federal mandate or otherwise, could impose restrictions on the rates we charge to provide our services, including the inability to implement approved rates, or delay actions with respect to our rate cases and filings. The COVID-19 outbreak may affect our ability to timely satisfy regulatory requirements such as recordkeeping and/or timely reporting requirements. As the U.S. Environmental Protection Agency and many state environmental agencies have issued enforcement discretion policies for such issues, it is unclear whether the effect of any possible noncompliance due to COVID-19 will be material.

Furthermore, in the event a substantial portion of our workforce were to be impacted by COVID-19 for an extended period of time, we may face challenges with respect to our services or operation and we may not be able to execute our capital plan as anticipated. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders, and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our suppliers and other business counterparties to experience operational delays. We have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. However, the quarantine of personnel or the inability to access our facilities or customer sites could adversely affect our operations. Also, we have a limited number of highly skilled employees for some of our operations. If a large proportion of our employees in those critical positions were to contract COVID-19 at the same time, we would rely upon our business continuity plans in an effort to continue operations at our facilities, but there is no certainty that such measures will be sufficient to mitigate the adverse impact to our operations that could result from shortages of highly skilled employees.

As many of our employees and third-party service providers work remotely in accordance with government mandates, we face heightened cyber security risks related to unauthorized system access, aggressive social engineering tactics and adversaries attacking the information technology systems, network infrastructure, technology and facilities used to conduct our operations. We will continue to monitor developments affecting our employees, customers and operations. At this time, however, we cannot predict the extent or duration of the COVID-19 outbreak or its effects on national, state and local economies, including the impact on our ability to access capital markets, our supply chain and our workforce, nor can we estimate the potential adverse impact from COVID-19 on our financial condition, results of operations, cash flows and liquidity.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds


(c)	Issuer Purchases of Equity Securities.

Period
Total
Number
of Shares
Purchased (a)

Average Price
Paid per Share
(Including
Commissions)

Total
Number of
Shares
Purchased as
Part of a
Publicly
Announced
Program

Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
January 1 to January 31, 2019 12,425
$ 51.24
—
393,816
February 1 to February 28, 2019 —
—
—
393,816
March 1 to March 31, 2019 —
—
—
393,816



Period	Total Number of Shares Purchased (a)	Average Price Paid per Share (Including Commissions)		Total Number of Shares Purchased as Part of a Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31, 2020	12,404	$	68.24	—	393,816
February 1 to February 29, 2020	—	—		—	393,816
March 1 to March 31, 2020	—	—		—	393,816

_____________________

(a) Represents shares of common stock delivered to us as payment of withholding taxes due upon the vesting of

restricted stock held by our ~~employees, not considered part of the Company's repurchase program.~~

employees.


Item 5.	Other Information

Investors should note that we announce material financial information in SEC filings, press releases and, in some cases, public conference calls. Based on guidance from the SEC, we may also use the Investor Relations section of our website (www.epelectric.com) to communicate with investors about our company. It is possible that the financial and other information we post there could be deemed to be material information. The information on our website is not part of this document.


Item 6.	Exhibits



Exhibit Number			Exhibit


15
† 10.01			Form of Restricted Stock Award Agreement between the Company and Adrian J. Rodriguez, Interim Chief Executive Officer, General Counsel and Assistant Secretary of the Company, dated April 2, 2020.

10.02			Amendment dated February 12, 2020, to the Franchise Agreement between the Company and the City of El Paso, dated July 12, 2005.

15			Letter re Unaudited Interim Financial Information

31.01			Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01			Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH			Inline XBRL Taxonomy Extension Schema Linkbase Document

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104			The cover page from the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2020, has been formatted in Inline XBRL and contained in Exhibit 101.

†			Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	EL PASO ELECTRIC COMPANY

By:	/s/ NATHAN T. HIRSCHI
	Nathan T. Hirschi
	Senior Vice President - Chief Financial Officer
	(Duly Authorized Officer and Principal Financial Officer)

Dated: May ~~8, 2019~~7, 2020

5154



	Three Months Ended March 31, 2019
Lease cost (in thousands):
Operating lease cost	$	253
Short-term lease cost	274
Variable lease cost	34
Total lease cost	$	561



	March 31, 2019
Operating leases:
Operating lease ROU assets (included in electric plant in service)	$	6,217

Operating lease liabilities (current included in other current liabilities)	552
Operating lease liabilities (net of current included in deferred credits and other liabilities)	5,336
Total lease liabilities	$	5,888

Weighted average remaining lease terms (in years)	12.22
Weighted average discount rate	4.63		%



	Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	557



Year ending December 31,
2019	$	306
2020	770
2021	696
2022	639
2023	590
Thereafter	4,829
Total lease payments	7,830
Less imputed interest	(1,942		)
Total	$	5,888



	March 31, 2019
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Description of Securities (1):
Federal Agency Mortgage Backed Securities	$	694	$	(20	)	$	13,210	$	(271	)	$	13,904	$	(291	)
U.S. Government Bonds	4,722		(6		)	26,267		(1,194		)	30,989		(1,200		)
Municipal Debt Obligations	4,480		(332		)	1,614		(127		)	6,094		(459		)
Corporate Debt Obligations	6,851		(114		)	11,170		(299		)	18,021		(413		)
Total	$	16,747	$	(472	)	$	52,261	$	(1,891	)	$	69,008	$	(2,363	)



	Total		2019		2020 through 2023		2024 through 2028		2029 and Beyond
Federal Agency Mortgage Backed Securities	$	30,363	$	—	$	19	$	514	$	29,830
U.S. Government Bonds	49,402		2,356		20,491		21,282		5,273
Municipal Debt Obligations	9,548		649		3,446		3,566		1,887
Corporate Debt Obligations	47,669		940		21,968		11,488		13,273
Total Available for Sale Debt Securities	$	136,982	$	3,945	$	45,924	$	36,850	$	50,263



Description of Securities	Fair Value as of December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading Securities:
Investments in Debt Securities	$	1,656	$	—	$	—	$	1,656
Equity Securities:
Domestic	$	111,325	$	111,325	$	—	$	—
International	24,540		24,540		—		—
Total Equity Securities	135,865		135,865		—		—
Available for Sale Debt Securities:
Federal Agency Mortgage Backed Securities	30,713		—		30,713		—
U.S. Government Bonds	47,607		47,607		—		—
Municipal Debt Obligations	14,089		—		14,089		—
Corporate Debt Obligations	41,773		—		41,773		—
Total Available for Sale Debt Securities	134,182		47,607		86,575		—
Cash and Cash Equivalents	6,858		6,858		—		—
Total	$	276,905	$	190,330	$	86,575	$	—



	Three Months Ended			Twelve Months Ended
March 31, 2018 net income (loss)	$	(6,966	)	$	95,285
Change in (net of tax at 21%):
Increased investment and interest income, NDT (a)	14,839			63
Increased wheeling revenues (b)	1,358			2,065
Increased retail non-fuel base revenues (c)	882			104
Decreased Palo Verde operations and maintenance expenses (d)	657			3,404
(Increased) decreased income tax expense-other (e)	(1,327		)	15,344
Increased depreciation and amortization (f)	(1,036		)	(3,927		)
Increased interest charges (credits) (g)	(939		)	(1,866		)
Increased transmission and distribution operation and maintenance expenses (h)	(781		)	(2,374		)
Decreased deregulated Palo Verde Unit 3 revenues (i)	(456		)	(1,512		)
Increased operations and maintenance expenses at fossil-fuel generating plants (j)	(416		)	(5,559		)
Palo Verde performance rewards, net (k)	—			(3,954		)
Other	274			297
March 31, 2019 net income	$	6,089		$	97,370



Comparisons of kWh sales and operating revenues are shown below (in thousands):
							Increase (Decrease)
Twelve Months Ended March 31:	2019			2018			Amount			Percent
kWh sales:
Retail:
Residential	3,003,221			2,837,694			165,527			5.8	%
Commercial and industrial, small	2,429,612			2,408,795			20,817			0.9
Commercial and industrial, large	1,054,605			1,040,606			13,999			1.3
Sales to public authorities	1,566,845			1,557,436			9,409			0.6
Total retail sales	8,054,283			7,844,531			209,752			2.7
Wholesale:
Sales for resale - full requirement customer	59,031			63,696			(4,665		)	(7.3	)
Off-system sales	2,660,907			2,310,338			350,569			15.2
Total wholesale sales	2,719,938			2,374,034			345,904			14.6
Total kWh sales	10,774,221			10,218,565			555,656			5.4
Operating revenues:
Non-fuel base revenues:
Retail:
Residential	$	298,757		$	289,866		$	8,891		3.1	%
Commercial and industrial, small	194,048			198,311			(4,263		)	(2.1	)
Commercial and industrial, large	35,040			37,629			(2,589		)	(6.9	)
Sales to public authorities	95,589			97,496			(1,907		)	(2.0	)
Total retail non-fuel base revenues (1)(2)	623,434			623,302			132			—
Wholesale:
Sales for resale - full requirement customer	2,850			2,743			107			3.9
Total non-fuel base revenues	626,284			626,045			239			—
Fuel revenues:
Recovered from customers during the period	145,094			210,704			(65,610		)	(31.1	)
Over collection of fuel (3)	(9,544		)	(16,553		)	7,009			42.3
Total fuel revenues (4)(5)	135,550			194,151			(58,601		)	(30.2	)
Off-system sales (6)	98,342			67,841			30,501			45.0
Wheeling revenues (7)	20,745			18,133			2,612			14.4
Energy efficiency cost recovery (8)	9,480			1,916			7,564			—
Miscellaneous (7)	7,739			8,836			(1,097		)	(12.4	)
Total revenues from customers	898,140			916,922			(18,782		)	(2.0	)
Other (7)(9)	4,113			4,253			(140		)	(3.3	)
Total operating revenues	$	902,253		$	921,175		$	(18,922	)	(2.1	)
Average number of retail customers (10):
Residential	375,649			369,554			6,095			1.6	%
Commercial and industrial, small	42,354			42,010			344			0.8
Commercial and industrial, large	48			48			—			—
Sales to public authorities	5,898			5,571			327			5.9
Total	423,949			417,183			6,766			1.6