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El Paso Electric Co. (NYSE:EE)

Q1 2013 Earnings Conference Call

May 01, 2013 10:30 AM ET

Executives

Steve Busser – VP and Treasurer

Tom Shockley – CEO

David Carpenter – SVP, CFO

Analysts

Neil Mehta – Goldman Sachs

Anthony Crowdell – Jefferies

Maury May – Wellington Shields

Michael Klein – Sidoti & Company

Tim Winter – Gabelli & Company

Operator

Good day and welcome to the El Paso Electric Company First Quarter Earnings Conference Call. Today’s conference is begin recorded.

At this time, I would like to turn the conference over to Mr. Steven Busser. Please go ahead.

Steve Busser

Thank you, Shelley, and good morning to everyone. Thank you for joining the El Paso Electric Company first quarter 2013 earnings conference call. Also on the call with me today I've our CEO, Tom Shockley, and our CFO David Carpenter.

Today, we will provide an update on our first quarter 2013 performance and discuss our key operating results. Before we get started I would cover some items that will be pertinent to our call. You should have a copy of our press release and if you do not you can obtain one from our website on the Investor Relations page.

We currently anticipate that our first quarter 2012 Form 10–Q will be filed with the SEC on or before May 10th, 2013. Additionally our 2013 Annual Shareholder Meeting is scheduled for May 9th, at 10:00 am here in El Paso. Please call our Investor Relations Department if you have any inquiries or require further information. A replay of today's call will be available shortly after our call ends and will run through May 15th. The details as it relates to the replay are disclosed in our press release.

I would now like to cover the Safe Harbor Provisions before I turn the call over to Tom. On page 2 of our presentation you will our Safe Harbor statement, in summary, our comments and answers to your questions may include forward–looking statements made pursuit to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Such forward–looking statements involve known and unknown risks and other factors, which may cause the company’s actual results in future periods to differ materially from those expressed here.

Any such statement is qualified by reference to the risks and factors discussed in our SEC Act filings. Our 10–K and other SEC filings contain our forward–looking statements and also lay out the risk factors that should be considered. These filings may be obtained upon request from the company on our website or from the SEC.

We cautions that the risk factors discussed in our filings are not exclusive and we do not undertake to update any forward–looking statement that may be made from time to time by or on behalf of the company. These statements, especially those made during the question and answer session of the call are subject to risks and uncertainties that are difficult to predict.

Now, I'd like to turn the call over to Tom.

Tom Shockley

Thanks, Steve. As you can see on our slide number 3 that you've got, we had earnings in the first quarter of $0.19 a share compared to last year's $0.08 a share. Later David Carpenter will step you through the reasons for those changes.

Also in the first quarter we were excited to finish the construction of our Rio Grande number 9 unit, which is an 87 megawatt aero–derivative gas turbine. We are in the final stages of testing it and expect it to go commercial later this month. So that’s an exciting addition to our power plant supply. For the rest of the year we will be focused on, you can see on page 4, we will be focused on advancing the construction of our new power plant in East El Paso, it's going to be called the Montana Station and it will have ultimately four 87 megawatt aero–derivative type gas turbines. So, it will give us a lot of capability to respond rapidly to any changes in our load needs and we're excited to have those as part of our fleet as well. We're in the process and finalizing all of the permits that we need, will be getting an air permit from the State of Texas as well as a Greenhouse gas permit from the EPA and we expect construction to start late this year or early in 2014.

So that’s an exciting thing, we've already gotten the CCNs for unit one and two and we expect to be filing for the CCNs for three and four later this summer. The other thing we will be focusing on is our union contract expires in September, so we will be actively involved in working with our union and getting a constructive settlement for both parties by the end of the summer.

So, we got our work cut out for us, but we are excited about things happening in El Paso and now I'll turn it over to David and he can fill you in on the rest of the information that we have for you.

David Carpenter

Thank you, Tom and good morning everyone. I would like to start on slide 5 of our presentation where you will see a summary of our first quarter key earnings drivers. For the quarter we reported net income of $7.6 million or $0.19 per basic share compared to the first quarter of 2012 results of $3.3 million or $0.08 per basic share. We're pleased to report robust growth in retail non–fuel based revenues which grew by 2.2% when compared to the prior year.

I will discuss the retail sales results for the quarter a little later in my comments. The increase in non–fuel base revenue added $0.04 to basic earnings per share.

Decreased operation and maintenance expense at our fossil fuel generating plants also added $0.04 per basic share compared to the prior year. The decrease in operation and maintenance expense was primarily due to planned major maintenance that occurred in the first quarter of 2012 on our Rio Grande Unit 8 and Newman Unit 1 generating units with no major maintenance activity in the current period.

Palo Verde operations and maintenance expense also decreased in the first quarter due to the timing of the spring refueling outage in 2012 compared to 2013. The 2012 spring refueling outage for Palo Verde Unit 3 began March 17th, while the 2013 spring refueling outage for Palo Verde Unit 1 did not begin until March 30th. This resulted in decreased Palo Verde operations and maintenance expense in 2013 which added $0.02 to basic earnings per share for the quarter compared to the previous year.

Allowance for funds used during construction or AFUDC also increased in the first quarter of 2013. Increased construction work in progress for Rio Grande Unit 9 and the New Montana Power Station accounted for most of the increase in AFUDC. AFUDC capitalization increased first quarter 2013 earnings by $0.02 per basic share compared to the same period in 2012.

Offsetting the previously mentioned increases, net income for the first quarter compared to the same period last year was negatively affected by an increase in administrative and general expenses which resulted in a decline in basic earnings per share of $0.03. The increase in administrative and general expenses was primarily the result of increased outside services. Also contributing to the increase in administrative and general expenses was increased benefits expense due to the significant forfeiture of employee stock award for previous executive officers in 2012 with no comparable activity in 2013.

Now, turning to slide 6, we detail by customer class the change in retail revenues and megawatt hour sales for the first quarter of 2013 and the percentage change over the comparable period in 2012. As can be seen on this slide, the increases in megawatt hour sales in retail non–fuel based revenues to residential and other public authority resulted in the increase in total retail non–fuel based revenue.

Megawatt hour sales to residential customers increased 7.7% and megawatt hour sales to public authorities increased 4.5% in the first quarter of 2013 compared to the first quarter of 2012. Favorable weather and growth in usage per customer in the current quarter versus the prior year accounted for the sales increase to residential customers. In terms of weather for the first quarter, heating degree days increased by 15.4% when compared to the same period in 2012 and were 9.7% greater than the 10 year average.

The increase in sales to other public authorities reflects increased sales to new customers and expanding loads at Fort Bliss and other large customers. Non–fuel based revenues for both small and large commercial and industrial classes declined primarily due to reduced rates for our Texas customers in these classes as a result of the 2012 Texas Rate Case Settlement.

As you can see on slide 7, the rate decrease for Texas customers which took effect on May 1st, 2012, as a result of the 2012 Texas Rate Case Settlement, decreased non–fuel base revenues by almost $2.5 million in the first quarter of 2013 compared to the same period last year. This decrease primarily affected small and large commercial and industrial customers. The rate decrease was offset by the effects of colder weather and increased heating degree days in the first quarter of 2013, which we estimate increased the quarterly retail non–fuel base revenues by just over $800,000. In terms of customer usage and growth, we estimate that retail non–fuel base revenues grew by just $4 million in the first quarter of 2013 compared to the first quarter of 2012. In summary, we were pleased to the $2.4 million increase in retail non–fuel base revenues we experienced in the quarter.

Now, turning to slide 8, we're reiterating our 2013 earnings guidance range of $2.20 per basic share to $2.60 per basic share. The first quarter represent less than 10% of our earnings guidance for 2013 and there were not any significant events in the first quarter which would affect our 2013 earnings guidance. As a result we're maintaining the earnings guidance issued earlier this year.

Finally, just a quick update on the regulatory front. We still anticipate that we will file for rate increases in early 2015 to reflect the Montana Power Station in our rate base. This now concludes our first quarter 2013 earnings presentation and I will now open up the call for questions.

Question–and–Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Neil Mehta with Goldman Sachs.

Neil Mehta – Goldman Sachs

Good morning.

Tom Shockley

Good morning.

David Carpenter

Good morning.

Neil Mehta – Goldman Sachs

As you think about rate case timing, the 2015 rate case for 2016 implementation, will that only be in Texas as it stands right now or could you file in New Mexico as well?

David Carpenter

No, I think as we have looked at the timing of the rate case further, we believe that we will likely file rate cases in both Texas and New Mexico, because Texas generally is the bigger impact then New Mexico we would probably try to file that first and follow shortly thereafter with the New Mexico case.

Neil Mehta – Goldman Sachs

Meaning, would you file both in 2015 or are you thinking about New Mexico potential filing in the 2014 timeframe?

David Carpenter

I think we would file both in 2015 probably on a pretty tight time schedule for both of them.

Neil Mehta – Goldman Sachs

Okay. How do you think about the trajectory of AFUDC, is there going to be an uplift in 2014 as you continue to build out Montana 2, and then, how much of a decrease should we anticipate in 2015 as the plant goes online?

David Carpenter

Yeah, clearly I think, there will be an increase in 2014 and then once the Montana plant goes in service in December 2014, you’ll see a decline then and then when the second unit of the Montana plant goes in service in probably around May of 2015, you will another decrease. So, we would expect 2014 to be a little higher than 2013 and 2015 to be a lit bit lower than with the decline from 2014.

Neil Mehta – Goldman Sachs

Okay. And last question around O&M. O&M decreased in the quarter, was 1Q just an unusually high period for outages, should we assume that 1Q20, meaning 1Q 2012 last year, should we assume this year's first quarter is the right run–rate and then what type of O&M growth do you expect for the balance of the year?

David Carpenter

We think that for the balance of the year Neil, that O&M will be fairly flat compared to last year. We will pick up a little bit of maintenance in the second quarter, obviously the Palo Verde maintenance will occur in the second quarter which some of the occurred last year. So, we expect Palo Verde to catch up in the second quarter and we also expect that will see some catch–up in the fossil fuel plant maintenance and O&M in the second quarter and further and other quarters this year, probably more in the fall.

Neil Mehta – Goldman Sachs

Okay, thank you very much.

Operator

And we will take our next question from Anthony Crowdell with Jefferies.

Anthony Crowdell – Jefferies

Hey, good morning guys. Hopefully two quick questions. One is, I wanted to know how much of the rate refund you have left to I guess, apply to customers is all booked and the second thing is the higher G&A that you announced and I think you said it was a negative $0.03 headwind for the quarter. Is that listed in other operating expenses or in some other section?

Tom Shockley

I may need to get you to repeat the second part of your question. So, let me answer the first part first. We think there is probably about $800,000 left in April for the rate decrease and then May was the start of the rate decrease last year. So, from May on it will be on comparable rate this year and last year. And can you repeat the second part of your question.

Anthony Crowdell – Jefferies

Sure. I was just wondering where in the income statement you book the higher administrative and general expense, I think, you said it's a negative $0.03 headwind for the quarter, is that in other operating and maintenance expense?

Tom Shockley

Yes.

Anthony Crowdell – Jefferies

Okay, great, thank you.

Tom Shockley

It is non Palo Verde operation and maintenance.

Anthony Crowdell – Jefferies

Got you.

Operator

(Operator Instructions) And we will take our next question from Maury May with Wellington Shields.

Maury May – Wellington Shields

Yes, good morning folks, good quarter.

Tom Shockley

Good morning, Maury.

Maury May – Wellington Shields

Anyhow I want to get back to AFUDC going forward for the next few years, I recall about a year ago, I think it Steve, I think it was you that actually gave us the projected numbers of AFUDC for several years ahead. So, I was wondering if you could do that again please.

Steve Busser

I think David did a pretty good job, I don’t have the exact number in front of me Maury, but I think, David did a pretty good job of walking through AFUDC, will see an increase relative to this year of probably about 10% to 15% over what we're expecting in 2013, we will see about a 10% to 15% increase in 2014.

Maury May – Wellington Shields

Okay. What are you expecting in 2013?

Steve Busser

Our expected AFUDC in 2013 is right at about $19.5 million.

Maury May – Wellington Shields

Okay.

Steve Busser

So, we expect a bit of an increase in 2014 and then as David mentioned we will see that tail off and probably get back, probably to around the 2012 levels if you just look into an approximate level and then beyond that I don’t think we have really given any guidance.

Maury May – Wellington Shields

Okay. Now, you said, 2014 will be up about 10% from 2013?

Steve Busser

10% to 15%, yeah.

Maury May – Wellington Shields

Okay. And could you remind us what the 2012 levels were?

Steve Busser

Yeah, 2012 was about $15 million.

Maury May – Wellington Shields

Okay. And so, you're saying 20 - 15 then we would return to 2012 level?

Steve Busser

Probably around that range Maury, I don’t have an exact number.

Maury May – Wellington Shields

Okay, okay, good. Second question has to do with cash, you ended the first quarter with $43.7 million in cash and I was wondering how that was created, because you used to have big cash piles, but then you bought stock and of course, you're building now, but where did the 43.7 come from and what you're going to do with it?

David Carpenter

Yes, we issued a $150 million of senior notes in December and so, basically what we have been doing is working that, we really kind of pre–funded construction for 2013 and so that was about $43 million at the end of the first quarter. We will see that decline some more once we get into the summer we will probably generate a little bit of cash and we think that by the end of the year we will be fairly flat, maybe borrowed a little bit, And then, of course, when you look at the construction expenditures in 2014 being over $325 million around $325 million we’ll need to go out and borrow some more money in 2014 to finance our construction program.

Maury May – Wellington Shields

Okay. But, alright. You really, you have what, several hundred thousand shares left in the share repurchase program, I guess you really don’t see you all buying any of that, do you?

David Carpenter

No, we really don’t, not this year, for the next couple of years probably.

Maury May – Wellington Shields

And then, my final question has to do guidance. So, despite the rather buoyant first quarter, you're maintaining your guidance at 220 to 260 which is kind of a wide range, I was wondering whether you could give us some color on that guidance and whether you think you might be in the middle of the guidance, upper end, lower end that kind of thing?

David Carpenter

Well, I think right now, our expectation will be close to the middle and assuming normal conditions and our guidance range always reflects, I think, we've mentioned before that probably about half of our guidance range is the potential for weather related changes that if we have really hot summer, we probably move towards the upper end guidance, if we have a milder summer, we move to the lower end. But, the summer weather really is a significant factor, much more significant than the weather in the first quarter, our overall earnings. And so, really until we get through the summer we probably won't tighten our guidance.

And then, the other factors are just variances and are revenues from Palo Verde units where you have the primary drivers for changes in guidance going forward. And gain, really we won't have a more detailed analysis on that to later in the year.

Steve Busser

This is Steve. I want to just clarify the answer that I gave you on the AFUDC issue, I think, I nudge you to believe that 2015 would go back to 2012 levels and what I meant to say is, 2015 will go back to 2013 levels.

Maury May – Wellington Shields

Right, okay, okay, yeah. Okay, good that’s a little bit higher then. Okay, thanks Steve, thanks David.

David Carpenter

You're welcome.

Operator

And we will take our next question from Michael Klein with Sidoti & Company.

Michael Klein – Sidoti & Company

Hi, good morning.

David Carpenter

Good morning.

Michael Klein – Sidoti & Company

Real quickly and I apologize if you answered this already. Just looking at the variance between sales growth and population growth, obviously sales growth was heavily driven by weather, but the population growth held of, is this sort of a run–rate to assume going forward or was it just a seasonality, how can you guys characterize that?

David Carpenter

We think that to a large extent this is probably, primarily seasonality. There is a small portion of it is kind of related to, we have kind of probably understate growth rate because we have a number customers that are being consolidating their account. And so, what we really haven’t had, the number of customers are still there, the load is still there because they have consolidated accounts, you've had a decline this is primarily in the small commercial class where they have consolidated account. So, if they have 10 different service load and they connect, and they now list that as one load, it declines our customers by nine.

And so, we have had a little bit of that, I think, you see that primarily in the small commercial class. And then, the other thing that we will see and I think when we had Dr. Gilmer speak at our Analyst Day in February, he mentioned a slowdown in the economy in the first half of 2013 and then a pick up in the second half. And what we're really seeing is maybe a little bit of a slowdown in the first half, but when we talk to our construction people that are out working on, setting up new subdivisions and new loads, they tell us that they are busier then ever. And so, our expectation is that, we may continue to see a little bit sluggish customer growth in the second quarter and then kind of the, right in our expectation that probably picks up in the third quarter.

Michael Klein – Sidoti & Company

Okay that’s helpful. And you still think that 1%, 1.5% growth on an annual basis is achievable, realistic?

David Carpenter

We think so.

Michael Klein – Sidoti & Company

Okay, great. That’s all I have, thank you very much.

Operator

And we will go to Tim Winter with Gabelli & Company.

Tim Winter – Gabelli & Company

Good morning and congratulations on the quarter. I just want to follow up a little on help of the service area. You talked about the military base expansion maybe slowing in 2013 and a number of sort of developments like baseball stadium and medical facility. Could you just give us an update on all that?

David Carpenter

Sure. We're continuing to see expenditures made at Fort Bliss, we're not really seeing a troop set, I think there is, I'm not, Steve can correct me here, I think there is about 3,000 troops that are still deployed and that are suppose to be coming back later this year. But, what we're seeing is continued construction of housing at the base and other facilities, the hospital complex I think has now started physical construction.

And so, we will continue to see some pick up from that. We’re also seeing some construction activity related, well lot of construction activity related to construction of homes and apartments in El Paso. And we're also continuing to see the expansion of the medical facilities, they're proposing a $25million construction, I think this doesn’t begin until 2014 for this medical centers of Americans which is above medical research part associated with Texas Tech University Medical School. And I believe that's slated to begin construction in 2014. Anything else Steve.

Steve Busser

We had bond with Navy that was passed in late 2012 for about $475 million of cordial life bonds. They've recently demolished City Ha, which is where the new baseball stadium will go. So, construction is underway to begin that effort and there is other committees and things of the like at the city level that are trying to determine exactly how they're going to spend those dollars for other projects around the city.

David Carpenter

And one other thing I just forgot about there, we're continuing to see a large amount of money being spent on highway construction in El Paso as they kind of build out the highway system to help support the growth that we have been seeing.

Tim Winter – Gabelli & Company

Okay, great, thank you.

David Carpenter

Thanks Tim.

Operator

And now no further questions at this time.

Tom Shockley

Thank you Shelley and thank you to all who joined us today, we appreciate your attention and have a great day.

Operator

Thank you. This concludes today's presentation, we thank you for your participation.

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