El Paso's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.24.14 | About: El Paso (EE)

El Paso Electric Co. (NYSE:EE)

Q4 2013 Results Earnings Conference Call

February 24, 2014 11:00 AM ET

Executives

Steve Busser - Treasurer

Tom Shockley - Chief Executive Officer

David Carpenter - Executive Vice President

Nathan Hirschi - Chief Financial Officer

Mary Kipp - Senior Vice President, General Counsel and CCO

Steve Buraczyk - Senior Vice President, Operations

Edward Escudero - Chairman, Audit Committee

Analysts

Neil Mehta - Goldman Sachs

Chris Kovacs - Levin Capital

Brian Russo - Ladenburg Thalmann

Matt Fallon - Talon Capital

Anthony Crowdell - Jefferies

Maury May - Wellington Shields

Chris Ellinghaus - Williams Capital

Ashar Khan - Visium

Rocky Bacchus - Efficiency Power

Operator

Good day, everyone. Welcome to the El Paso Electric Company Fourth Quarter 2013 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the call over to Steven Busser. Please go ahead, sir.

Steve Busser

Thank you, Ma’am. Good morning, everyone. And thank you for joining the El Paso Electric Company fourth quarter 2013 earnings conference call and analyst day. My name is Steve Busser, and I am the Treasurer for El Paso Electric.

Also here with me today is our CEO, Tom Shockley; our Executive Vice President, David Carpenter; our Chief Financial Officer, Nathan Hirschi; our Senior Vice President, General Counsel and Chief Compliance Officer, Mary Kipp; and our Senior Vice President of Operations, Steve Buraczyk. In addition, I would also recognize the Chairman of our Audit Committee, Mr. Edward Escudero, who has joined us today. Thanks, Ed.

Today, we’ll provide an overview of our 2013 accomplishments and operational highlights, our shareholder return, our goals for 2014 and overall El Paso outlook and update on Four Corners and the remaining EPA or Environmental Protection Agency air permit that we are seeking for our Montana Power Station.

We will also provide an update on our capital construction program, our revised estimates of our projected rate base and update on the timing of our planned Texas and New Mexico rate case, an overview of our fourth quarter and year-to-date 2013 financial performance and finally, we will provide our 2014 earnings guidance.

I would like to 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 2013 Form 10-K will be filed with the Securities and Exchange Commission no later than this Friday, February 28th.

We’d also like to inform you that we plan on participating in the Williams Capital Group West Coast Utilities Seminar in Las Vegas on March 19th and 20th. Please feel free to 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 the call end and will run through March 10, 2014. The details as it relates to the replay are disclosed in our press release.

On slide four of our presentation, you will see our Safe Harbor statement. In summary, our comments and answers to your questions may include forward-looking statements made pursuant 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 the company’s SEC Act filings. Our 10-K and other SEC filings contained forward-looking statements and also layout the risk factors that should be considered. These filings may be obtained upon request from the company, on our website, or from the SEC.

The company cautions that the risk factors discussed in these filings are not exclusive and we do not undertake to update any forward-looking statements that maybe made from time to time by or on behalf of the company. These statements, especially those made during the question-and-answer portion of the call are subject to risks and uncertainties that are difficult to predict.

Tom will now go over our 2013 accomplishments.

Tom Shockley

Thank you, Steve. I would like to point out that Steve did introduced the management team that we have here today, I would like to put a little bit more color on it and point out that, three of the faces, David, (inaudible) and Steve right here and mine are probably fairly familiar with virtually all of you, but we have got three new members of our management team and its Nathan Hirschi, who was in October of last year made the Chief Financial Officer, obviously responsible for the controller function, as well as the treasury function.

Next to Nathan is Steve Buraczyk, Steve is the Senior Vice President of Operations, which includes all of distribution and transmission operations, our generation operations, as well as our fields and marketing and the system operations. So anyway if it goes wrong we all start looking for that Steve.

And then next to him is Mary Kipp. She involved in Compliance and HR at the moment, so Compliance, HR and General Counsel. We have now put all of our regulatory activities under her. So she is going to have the wonderful opportunity to position us for the rate cases that we will be discussing about today.

The accomplishment that Steve referred to or in your package, I will set to them real quickly. But I will start with the increase in our dividend of 6% that occurred last May, at the time of our Annual Board Meeting.

We also successfully completed union negotiations in September of this past year and that puts in place a new agreement, a new three-year agreement, which we are very pleased with.

Also last year, we negotiated and started construction on a 50-megawatt photovoltaic total facility at a place called Macho Springs. It’s quite large. We are excited about it. It will be owned by the developer and we will have 100% of the off-take and the most amazing thing to us was that the price to us is $5.79, which one of the lowest prices ever that we had seen from across as a consequence for the RFP.

We also have filed the CCN for our last two units at the Montana Power Station. I expect to get those this year. The other positive things that happened is that in the process of starting the Montana Power Station, a neighborhood group was very concern and we have been working with them for the last year and late last year we were able to put in place a settlement where truly all parties are satisfied and we are able to move forward with that particular group happy with the way things have turned out.

So the consequence of that we did receive the final now unappealable air permit from the State of Texas, the TCEQ, and Mary will have more information about the other permits that -- other permit singular that we are working on. And then lastly we had a pleasant increase in our ratings from Moody’s from Baa2 to Baa1.

Some operational highlights, we are always pleased when we have a good reliability record. The State of Texas track the reliability each of investor owned utilities and rates us and I am pleased to say that we have been rated #1.

There are two different factors that they look at the frequency of interruptions and then the duration, the average frequency and the average duration, and we have been #1 this past year but also for the previous three year before that. So we are very, very pleased with that.

We have set a new record peak last year in June of 1,750 megawatts, and we entered into build another solar agreement, the plant that will be built by others at our Newman Power Plant and we will have -- it will be 10 megawatt and we will have the opportunity, it will be a PPA from the developer to us.

And also last year in May, the very fast with our aero derivative gas turbines, which can be find very quickly to increases and decreases in load was completed and put in commercial operation at our Rio Grande plant and it is Rio Grande 9 and it’s been working very, very well and very, very constructive.

The next slide pretty well speaks to itself. I think, you can see the comparisons that we put there for you. The one thing I would point out is over on the right hand side, where we have got a graph that shows you our return of capital to our shareholder. These shows a transition from ’09 and ’10, which all of the return of capital was by the repurchase of stock.

In ’11 we reinstituted the dividend, so in ’11 that’s a combination of repurchase stock plus the beginning of our dividend and then we have increase, as I mentioned earlier, our dividend each year for the last three years. And 2013 represent just a dividend payout we have not been repurchasing stocks since that time.

Our goals for this year, for ’14, focused primarily on our Montana Power Station. We have the finalized the permit. We have to move forward with construction. We have got everything ready to go and soon as we get clearances, we will be able to move forward with that. We will also be finalizing the CCN required for our Units 3 and 4. We have obviously the all of the needed CCN requirement for Unit 1 and 2.

So as a consequence of this fairly major building program for this year, we will be, towards the end of the year, the last half of the year, we will be raising debt. We also have the opportunity to expand our revolving credit facility. So we have got quite a bit of flexibility on both counts. And then as we move into beginning of the construction of these power plants it will give us an opportunity to very specifically start putting together timelines for the rate basis that will be coming up after their completion.

With regard to growth in the area, we continue to see a very, very major project developing on the base. It is the hospital out there, $1 billion installation but while at the same time, we see a lot of the expansions that we've enjoyed at Bliss the last several years is slowing down.

Another very positive economic development activity is in a little suburb of El Paso called Santa Teresa, it is in southern New Mexico and Union Pacific is building a major facility intermodal rail yard to continue to be able to take product and distribute them very efficiently across the United States.

Another project, it is having a very, very positive effect is at Tex DOC, our state Transportation Department has identified $800 million worth of projects, highway-type projects that they have started work on and that constructions will be beginning in 2014.

Also this year for the first time, El Paso Electric has a new Triple-A ball team and to accommodate our Triple-A ball team, we got a brand new stadium in the middle of downtown El Paso. It is going to be a very, very positive thing. We can see it coming together and the team will start playing there for the end of April. Everyone’s excited about that.

I think we’ve mentioned to you the last time we were here, the fact that the city had quality-of-life bonds in the past a little over a year ago. They provide almost $0.5 billion of city improvement and parks, museum, swimming pools, hiking trails, those things that we think really make El Paso, a destination that people will love to be involved in, so very positive development.

And then finally, we have got University of Texas at El Paso that continues to grow. It’s a facility that is especially very good to our community but more particularly they have now identified $300 million of what’s being termed Campus Transformation, which will continue to make that campus a very, very great place for students that need the education there as well as our building community.

The last couple of comments that I will point out is that our Juarez situation continues to improve, the violence across the border as they then dramatically reduced from what it was several years ago. And last year, $86 billion worth of commerce -- that was $86 billion of commerce in El Paso and Juarez which is a knee kind of a staggering number.

We’re also going to have a new port of entry which will facilitate continued growth in the transactions between United States and Mexico, a new bridge Tornillo-Guadalupe International Bridge will add to the capacity, traffic being able to cross the border, which has been a huge restraint and being able to move people? Every time you look and see the bridges, they are just backed up for ever. So this will be a very, very positive sign.

A 10% increase in maquiladora output which is the plants that are supporting U.S. companies with the work in labor forces in Juarez, a 10% increase in their output leads to a 2.8% increase in El Paso total population. So historically, the maquiladora industry has been important for El Paso and it continues to be so and we’ve seen an upswing in the amount of companies that are looking forward to, interested in growth in the maquiladoras.

So with that, Mary has got some information for us. I’m sure all of you made note on what question you’re going to ask when we get to the Q&A with Eric.

Mary Kipp

Thank you, Tom and good morning everyone. As Tom mentioned, I’m here to provide you with some updates on our Four Corners Generating Station as well as the air permit timing we’re anticipating on our Montana power station. And then I’ll also talk a little bit about the impact of the air permit timing on our anticipated rate case strategy.

And I also wanted to mention before I got any further that David Carpenter is continuing to work very, very closely with me as we formulate our rate case strategies going ahead. And in fact, we’ll talk to a little bit later in a little more granularity about what we’re planning to build.

Turning to Slide 13. Here we go. After a comprehensive analysis, looking at a variety of factors, we’ve decided that it’s not in the best interest of our customers or our shareholders to continue with Four Corners as most of you know, we own a 7% undivided interest in that plant. And we’re nearing the end of about 15 year participation agreement which was the original anticipated life of the plant.

And we will not be participating in Four Corners beyond July of 2016. One of the driving factors on this is the uncertainties surrounding our environmental regulations and future costs of complying with them. We’re in a fortunate situation where we own very little coal as it is and once we are out of the Four Corner station, we will be across the utility in terms of ownership.

Upon our exit, however, we are going to work very, very closely with our co-participants to facilitate their body to move ahead with the plant. And I think, some of you probably aware that ATS has expressed an interest in buying our portion of the plant and we will be working with them to facilitate that we’re in very, very -- we're very early in discussions but we will keep working on that as we move ahead.

Turning now to Slide 14. I want to give you an update on the Montana Power Station and our air permit application spending before the EPA. On this slide, we have a graphic that illustrates the steps that must occur before we can -- again construction of the plant and ultimately the inclusion of plant in rate base in our service territories.

Our goal as well as our expectations is that we will get a permit from the EPA by the end of August. We previously provided a May date for that in a couple of factors that caused us to extent that prior three months. The first one is that we saw and received a 28-day expansion on a common period which enabled us to negotiate a settlement with the Far East El Paso Citizens United which was the local citizens group Tom talked about previously.

So they have -- they are no longer opposing our permits. So they are out of the process. The second is that the Sierra Club, some of you now has filed comment in our proceeding. And so we added to the timeline a little bit more time for the environmental appeal of the board -- Environmental Appeals Board to consider an appeal which we anticipate will be filed by the Sierra Club.

With an August permit date, we would anticipate completing construction as unit one and two by the end of May of 2015. We would then file a rate case in Texas based on a June 2015 test year and we would anticipate that we would have rates taking effect early in the third quarter of 2016.

In New Mexico, we have a little bit more flexibility in terms of reaching forward. So we would anticipate filing a rate case to New Mexico, using a historic test year ended December 31, 2014. We would then use a post-test year adjustment to include the two Montana units and we would expect new rates in New Mexico to be in effect by April of 2016.

As detailed in Slide 15, our assumption is that to reach these timelines we would need to have regions that issue a final permit subject to appeal by the end of the first quarter. We would also need the Environmental Appeals Board or the EPA to resolve any requested appeal by the end of the third quarter.

And as I mentioned previously, the Sierra club has filed comments on the draft permit and that is -- the assumption that they will appeal is reflected in our timeline. There is also local landowner who wants some property adjacent to the site who has filed a comment and we don’t know if this person will appeal or not and obviously we’re continuing to work on a compromise that are anticipated timeline does not reflect the possibility of a settlement with the Sierra Club.

Similarly, it does not reflect items that could delay the effective date beyond the third quarter of 2014. The first would be internal delays at Region 6, which would delay their issuance of the final permits beyond the end of the first quarter. Second would be Environmental Appeal Forward or the EAD, didn’t resolve any appeal by the end of the third quarter. And then the third would be if there were an issue found by the Environmental Appeal Board, which they felt required that our permit be revised.

As I said, rather the timeline reflects what we believe is the most likely outcome in terms of the timing for receipt of our permits, we’ll continue to work with the parties who have filed comments. We will continue to work with our regulators as we have to ensure that we have a very defensible permit, and we will seek to provide you updates as the process plays out.

Now, I would like to introduce, Steve Buraczyk who is our Senior Vice President of Operations and he will give you an update on our capital construction program.

Steve Buraczyk

Thank you, Mary. If you would, please turn to Slide 17 for generation additions schedule through 2018, and this includes all four units of the Montana Power Station. And this schedule assumes that the final air permit is received from the EPA, and construction for the firs two units at the Montana Power Station begins by September of 2014.

As can be seen here, the first two units at Montana would be completed in 2015 and third and fourth units will be completed in 2016 and 2017. The retirement of Rio Grande Unit 6 is scheduled for December of this year, however, the unit maybe kept online for an additional period of time to cover our capacity reserve margins in the event of any delays associated with the EPA air permit for the Montana Power Station.

Now, as Mary previously mentioned, in July of 2016, El Paso Electric will cease participating in the Four Corners generating station. However, by the end of 2017, El Paso Electric’s net generation capability will have increased by 199 megawatts. Also illustrated on this slide is the upward trend of our peak load projections, and this reflects the continued growth for service territory and also helps to explain the need for additional generation of this plant used to meet its projected workload.

Turning to Slide 18, you will see our anticipated cash, capital expenditures over the next five years. We currently estimate that the 2014 capital expenditures will be $327 million, and that’s primarily due to the Montana Power Station construction and associated transmission and distribution cost occurring this year.

On average, we expect to spend $254 million per year from 2014 through 2018. And in total, we anticipate we will spend almost $1.3 billion through 2018. On the slides to follow I will provide some additional details on our capital construction program by functional area.

Turning to Slide 19, the generation expenditures through 2018 are detailed. We anticipate spending a total of $584 million in generation capital expenditures, consisting of $345 million for new generation plant, $179 million for Palo Verde related capital costs and $60 million for other generation.

On Slide 20, you can see that we expect to spend a total of $510 million for transmission and distribution expenditures during the period. The $510 million consists of $193 million for transmission, including transmission necessary to interconnect the Montana Power Station and $317 million for distribution related to customer growth and replace ageing infrastructure.

On Slide 21, we detail the total general capital expenditures. We are currently projecting to spend approximately $180 million through 2018. The primarily general capital expenditures are related to information technology, transportation, communications and facilities project.

The facilities projects expenditures include the construction of the new distribution operation center, which will be located adjacent to the Montana Power Station. This facility will consolidate many of our warehousing fleet, line crew and engineering personnel into one location that’s closer to the portionable path that is experiencing the majority of the growth.

This will allow us to improve our response time as well as improve our efficiency of our operations. The construction of the facility began in October of 2013, and the total cost is projected to be approximately $38 million. Approximately, $33 million is projected to be spent in 2014 and 2015, and center is expected to be completed by March of 2015.

Next, David Carpenter will provide some additional color on our capital construction program that will impact the growth of rate base as well as our regulatory strategy.

David Carpenter

Good morning. Thank you, Steve. Today, I would like to provide everyone with the revised rate base projection based on the new capital construction plans. The earliest and most likely timeframe for completion of Unit 1 and 2 of the Montana Power Station is the second quarter of 2015, before the 2015 summer peak periods.

Steve Busser just showed the construction expenditures based on this schedule. We are providing Slide 23 -- we are providing Slide 23 to show our expected rate base after the completion of the Montana unit. The first column shows the additions to rate base through the completion of Montana Units 1 and 2.

Since the Montana Power Station Units 1 and 2 are expected to be completed in the second quarter of 2015, the column labeled MPS 1 and 2 shows the estimated corresponding rate base by the end of the second quarter of 2015.

As you can see, we anticipate an increase in our rate base of approximately $400 million between now and the second quarter of 2015. As I will discuss in more detail on the next slides, we anticipate filing rate cases in Texas and New Mexico in 2015 in order to reflect these plant additions in rate base.

This slide also shows our anticipated rate base after the completion of Montana Unit 3 in the second quarter of 2016, and Montana Unit 4 unit in the second quarter of 2017. Currently, we anticipate filing a second rate case after the completion of Montana Power Station Unit 4 in 2017.

However, if it is determine that additional rate case is needed, we could file a rate case after the completion of Montana Unit 3 in 2016, and then file a third rate case after the completion of Montana Unit 4 in 2017. Given the nature of the growth in our service territory and ultimately our rate base, it is paramount that we obtain rate release in a timely manner in order to minimize the impact of regulatory lags.

On Slide 24, we show our expected timeline for the initial rate case filing in Texas and New Mexico, assuming that Montana Power Station Units 1 and 2 are completed in the second quarter of 2015. The timing of filing the right case is dependent on completion of the first two units at the Montana Power Station. If we were able to obtain the air permits this summer and start construction by September this year, we believe as Mary stated previously that the first two units at MPS will be commercially operational by June 2015.

We currently expect to file rate cases in both Texas and New Mexico using historic test years. As for New Mexico, the rules for post-test year adjustments will allow us to file a rate case using a historic test year ended December 31, 2014 and reflect both Montana Power Station 1 and 2 in rate base through a pro forma adjustment. We would file the rate case in May 2013, and would expect an order by April 2016.

New Mexico also has the ability to suspend the effective date another three months, but we believe that by using a historic test year, it will allow us to obtain rate relief in the 10 months -- the minimum 10 months statutory suspension period. If commercial operation date of the plans is delayed beyond May 2015, we would probably delay the New Mexico rate case filing.

As for Texas, the rules for post-test year adjustments are not as advantageous as in New Mexico. Therefore, we would likely wait until after the units are completed and file a rate case using a historic test year ended June 30, 2015. This will allow the rate case to be filed in November 2015. Rates would be expected to become effective in Texas by July 1, 2016, assuming the statutory 185-day suspension period.

All totaled, we estimate that we will be able to implement new rate in Texas and New Mexico to recover these costs by the third quarter of 2016 and in New Mexico rates could become effective as early as April 2016. I will continue to work closely with Mary and Nathan to ensure continuity of our rate case strategy.

At this time, I will turn the call over to Nathan Hirschi, our Chief Financial Officer to discuss the financial results for the quarter and year-to-date periods ended December 31, 2013. Thank you.

Nathan Hirschi

Thank you, David. And good morning, everyone. I would like to go with fourth quarter earnings results on slide 26. For the fourth quarter of 2013, we reported net income of $1.2 million or $0.03 per share, that’s compared to fourth quarter of 2012 we reported net income of $4.8 million or $0.12 per share. For the year-to-date period, we reported net income of $88.6 million or $2.20 per basic share, compared to $90.8 million or $2.27 per basic share for 2012.

Looking at the slide 27, and go over to results, the key drivers for the earnings for the fourth quarter of 2013. On the negative side, we saw decline in basic earnings per share for the quarter of $0.07, resulting from increased O&M due to a one-time refund of -- in 2012 of transmission wheeling expense without a corresponding amounts in the current year.

Plus, we had increased level of planned generation maintenance and an increased level of consulting services related to our future involvement in the Four Corners Generating Station.

We also experienced decline in basic earnings per share of $0.04 per share as a result of decreased non-fuel base revenues due to milder weather and the effects of the federal government sequestration and shutdown in October 2012.

Also negative affecting quarterly earnings was increased interest expense related to our senior notes that were issued in December of 2012. This increased interest had a $0.01 per share effect on net income.

In addition, the Lower Palo Verde Unit 3 revenues associated with our fall 2013 refueling outage and decreased AFUDC due to lower levels of construction each accounted for $0.01 per share decline in net income.

On the positive side, we had an income tax benefit related to positive developments in state audits and settlements -- state income tax audits and settlements partially offset by decreased a similar benefit recorded last year which had a $0.03 per share benefit in the fourth quarter of 2013.

Looking at revenue changes for the quarter, total retail sales declined by 1.1% partially as a result of cooler weather we experienced in the fourth quarter of 2013 as compared to 2012. Cooling degree days decreased approximately 51% as compared to last year and were lower than the 10-year average by 28%.

Non-fuel base revenues for residential class remain relatively flat when compared to fourth quarter. Although the decline in non-fuel base revenues was experienced in all other customer classes, the decline in residential class was mitigated by our robust customer growth.

During the quarter the average number of retail customers grew by 1.3%, which is largely in line with the customer growth rate we’ve seen in recent years. The increase in the average number of customers helped offset the milder effects of weather.

Our public authorities class was impacted by the fiscal sequestration, government shutdown and the increased use of renewable energy at the military bases we serve. We will discuss the impact weather on our fourth quarter results a little bit more in a moment.

Looking at the key earnings drivers for the year, we see that we had one of the negative earnings drivers was increased in O&M expense, which was primarily due to increased outside services for software support and upgrade and increased consulting services related to our future involvement in the Four Corners Generating Station.

Although the level of O&M negatively impact our year-over-year results, overall O&M was nearly flat for the year with only a 0.4% increase. As a result, we see the relatively flat O&M as a positive development for the year.

We experienced a decline in basic earnings per share of $0.06 resulting primarily related to earnings, related to a decrease in non-fuel base revenues reflecting our lower non-fuel base rates in Texas that went into effect on May 2, 2012 and a decline in revenues from our public authorities customers.

For 2013, earnings were negatively impacted by an increase in interest expense associated with the senior notes that were issued in December 2012. The increased interest on long-term debt was $0.07 per share reduction in net income.

On a positive side, we see deregulated Palo Verde Unit 3 revenues increased by $0.02 per share which was primarily due to a 19% increase in power prices offset by an 8.5% increase in nuclear fuel cost and a 3.8% reduction in the amount of generation in 2013 when compared to 2012. Increased AFUDC due to higher balances and construction work in progress increased earnings by $0.02 per share.

The higher balances were largely related to the construction of Rio Grande 9, which was placed into service in May of 2013. We also recognized an income tax benefit related to positive development in the state income tax audits and settlements which benefited the year-to-date period by $0.03 per share.

Looking at year-to-date sales information on slide 30, we see that for 2013 total megawatt hour sales increased while revenues declined slightly. The decline in revenues in the commercial and industrial, small and large customer class is primarily attributable to the reduction in our non-fuel base rates resulting from the 2012 rate case settlement which reduced year-over-year revenues by approximately $303 million.

The decline in revenues in the public authorities customers class also reflect impact of recently installed photovoltaic generation of Fort Bliss and the White Sands Missile Range. Additionally, 2013 revenues were negatively impacted by the federal government shutdown in October.

We continue to see growth in megawatt hour sales and revenues from our residential customers. Overall, the average number of retail customers increased by 1.3%. The number of customers increased by 1.3% in comparison to prior year, which is again in line with our longer-term trend. However, during 2013 we experienced milder weather as evidenced by 3.6% decline in cooling degree days. The weather trends have the impact of reducing our residential and commercial and small commercial and industrial revenue.

Looking at our capital requirements and liquidity on page 31, we spent approximately $237 million for additions to plant during 2013, which is approximately $35 million or 17% more than we spent on capital additions in prior year. Although we have not yet begun construction on a Montana Power Station we have spent approximately $99 million on materials and turbines for the new power plant than 2012.

In regards to the dividends, we paid $42 million to our shareholders in 2013. As Tom mentioned earlier, the quarterly cash dividend was increased by 6% in 2013 and we anticipate growing the dividend at a rate of 4% to 6% annually while keeping our payout ratio in the range of 45% to 55% over the long term.

Our Board of Directors revisits the dividend policy in conjunction with annual meeting which occurs in the second quarter. At the end of 2013, our liquidity was approximately $311 million, which consisted of a cash balance of $25.6 million and an available balance on our credit facility of approximately $285 million. In addition to the available liquidity and our expected cash flows from operations, we may need to excess debt capital markets in the second half of the year.

On slide 32, we take a little closer look, focus on our results for 2013 versus the guidance we previously provided. Despite a 4% increase in -- despite a 0.4% increase in total megawatt hour sales and a 1.3% increase in total customers serve for 2013 as compared to prior year, basic earnings per share of $2.20 was $2 million or $0.05 per share basic below the low end of our 2013 guidance, mainly due to lower than expected retail non-fuel base revenue. We attribute the decrease in non-fuel base revenues to lower than average cooling degree days in the federal sequestration, federal government shutdown and resulting furloughs as well as the solar installations at the military bases we serve.

Weather for the fourth quarter of 2013 was cooler than experienced in the fourth quarter of 2012. The last October, that we had less than 80 cooling degree days in our service territory, was in 2006. The weather was significantly cooler in the October month. It was just a last month of our higher summer rates that are being built. October 2013 had 84 cooling degree days less than the prior year and 831 cooling degree days less than the 10-year average.

The decrease in cooling degree days occurred in the first half of the month, which we believe was one of the primary fact which further reduced revenue we saw for the quarter. Typically when weather starts to cool down, people in the beginning of the month of October, people will not turn back on the coolers or their evaporative coolers as the temperature increases later in the month.

People who own evaporative coolers winterize or convert their coolers when temperatures drop. And this was relatively extensive and time-consuming process. People think we will not turn the evaporative coolers back on until the following spring. Therefore we believe the October weather trends resulted in lower than anticipated revenues for the quarter.

And again October is still a summer, the peak, the billing month for us, as the cooler weather trends have significant impact on our fourth quarter. Government actions also affect our fourth quarter.

On Slide 33, we see that our customers in the public authorities perhaps reduced their spending and shutdown to operations from October 1st to October 17th for the government mandate which impacted energy sales to those customers. This was compounded by the fact the government employment in El Paso service territory is estimated to be 25% of total employment.

The government employment in El Paso is estimated to be 25% of total employment. We estimated 4600 federal employees or approximately 27% of federal employees were furloughed during that period in October has resulted to government shutdown. All of these factors led to less than anticipated retail sales during the fourth quarter.

Slide 34, we look at -- we’ll finish up by looking at the earnings guidance for 2014. We’re initiating 2014 earnings guidance of $2.10 to $2.50 per basic share. The slide rolls forward our 2013 earnings of $2.20 to be midpoint of our range of $2.30 per share. The majority of these items that we’ll be talking about soon are very similar to items that we’ve already addressed today are increased construction activity to growth of our service territory and the increase in AFUDC that we have just associated with that.

As you can see the 2014 projected earnings are expected to be negatively impacted by taxes rather than income which is particularly increased by $0.09 per share to the higher property taxes associated with Rio Grande 9 which was place in service in May of 2013, plus other property additions and also higher revenues will result in higher revenue related taxes.

Depreciation and amortization expenses are also expected to increase by approximately $0.08 per share, which is related to the increased level of depreciable plant in service and including the full year of Rio Grande 9 and our other plants addition. In addition, in operations and maintenance expenses are anticipated to increase by approximately $0.08 per share due to a higher Palo Verde outage cost and additional average at Fourth Corner as well as increased maintenance and subcontractor cost.

This represents approximately 1.7% increase in O&M expense. The other category includes higher interest primarily related to the anticipated debt issuance that is likely to occur in the later part of 2014.

On the positive side, we anticipate earnings to increase in 2014 by 17% per share due to continued growth in our services territory, the midpoint of guidance assumes normal weather. The low and high end of guidance takes into accounts several considerations, fluctuations in base revenue due to weather.

It is important to note that our revenue assumptions do not include any extraordinary event such as the government shutdown that may increase -- that may cause -- that may negatively impact our service territory. We believe that the base revenues associated with the government shutdown that was experienced in the first quarter of 2013 was largely a one-time event and we do not anticipate to see a repeat of those factors.

We also see higher -- we also anticipate higher construction expenditures and associated higher AFUDC associated with that due to the construction of the Montana Power Station as well as the Eastside distribution center which we discussed earlier. That should have approximately $0.22 earnings per share increase. As David mentioned earlier, as we continue to build these new plant to meet the demands, this will also add to our rate base over time.

And that concludes my presentation. I’ll turn it back over to Steve to poll for question.

Steve Busser

Thank you, Nathan. We just want to do the question and answers in an orderly process. What we will do is we will start with the folks in the room here and then we will do the folks that are on the phone and have question. Lisa has the microphone and so if you’re in the room we’d just ask you to state your name prior to asking your questions so that we can get it properly transcribed since the call is being recorded. Neil Mehta from Goldman Sachs.

Question-and-Answer Session

Neil Mehta - Goldman Sachs

Just want to explore demand a little bit. What was weather-normalized demand in the fourth quarter on average in 2013 and then what is embedded in the 2014 guidance?

Nathan Hirschi

Well, the guidance for 2013 is thought to be weather. Though we had a decline of about $2.5 million in the October -- $2.5 million in October revenue. It is what we’ve focused. Primarily I thought is that the October weather of 2013 was below normal and at lower average sales. That would be $2.5 million in October. It was primarily the difference between our variance in fourth quarter revenue.

Neil Mehta - Goldman Sachs

If I think about ‘14 versus ‘13, what’s embedded in there in terms of the growth rate as a percentage. Is it the typical doubly 2% to 2.5% assumptions in terms of load growth?

Nathan Hirschi

That’s right, for residential. We know we lowered the load growth expectations for our military basis, that to be lower than that or lower than our historic trend. So it is for the residential to2.25 is the trend we’ve been anticipating.

Neil Mehta - Goldman Sachs

So for that total weather normal, do you have the number ‘14 versus ‘15?

Steve Buraczyk

It is about 2%. 2% and revenue growth is projected about 5%.

Neil Mehta - Goldman Sachs

And at the other piece I want to explore was solar. I guess at Fort Bliss, how many megawatts of solar is there and how big of an impact was that into the quarter and on a go-forward basis, just trying to strip that out relative to the furloughs to see what the relative impact?

Steve Buraczyk

Yeah. Fourth quarter Fort Bliss revenues were down approximately, I think at $500,000 for the quarter, Fort Bliss revenues were down. And for the year it was down by $1 million for the year. Well, how much of that is weather versus the solar, versus the shutdown is hard to determine, although we are seeing that Fort Bliss is not hitting the peak that it has historically and so. But it is hard to judge which one of the factors at Fort Bliss is in that.

Chris Kovacs - Levin Capital

Hi, Chris Kovacs, Levin Capital. Just a couple of quick questions, just want to clarify that I think you spent $99 million to date on Montana Power Station equipment and such. When I look at your Slide 23, by about $200 million between the common plant and more than two, as we think about spending over the next two years is about a $100 million incremental to that or is that the way we should we kind of monitoring the CapEx related to MPS?

Steve Buraczyk

For the Montana Power?

Chris Kovacs - Levin Capital

Yes. Yes.

Steve Buraczyk

I think the total cost in the Montana Power Station including common facility is about $340 million in total by the time we get to 2017.

Chris Kovacs - Levin Capital

Okay. That is what I wanted to, just wanted to bring it, the $200 million, looks like I’m here for those at the common and I think you said $99 million a day. I’m just wondering if it is driving additional $100 million over the next two years.

Steve Buraczyk

I think it is and probably a little bit more than our $100 million today.

Chris Kovacs - Levin Capital

And then, how should we think about how’s that split between ’14 and ’15?

Steve Buraczyk

As to how we’ll spend that money. See the majority of that money is going to be incurred. Since the majority of the money from the materials has already been incurred as that’s represents $99 million. There still are other components that needs to be procured for those three units. But I think depending on when we get the air permits that dollars could move. If we go with Mary’s timeline, that she mentioned earlier about the air permits in the third quarter of 2014, obviously that will start to ramp up and jump in. And once we start that, it’s a fairly ratable process in the rest of (inaudible).

Chris Kovacs - Levin Capital

Okay. And these levers included, are there any extra costs put in here to accelerate the timelines because you had that delay in few months, just go ahead and done by middle of next year?

Steve Buraczyk

We have not -- in these numbers, we don’t have any cost acceleration. There will be some cost acceleration that goes in fills those units relative to the normal 12 months schedule. So, I think that maybe the way to think about is some of the numbers that we talked about internally is that if you accelerate it from 11 or 12 months normal schedule capacity, about 6,000 units. So about (inaudible) nine months would be 6,000 for three months I assume.

Chris Kovacs - Levin Capital

Thank you very much.

Brian Russo - Ladenburg Thalmann

Hi, Brian Russo, Ladenburg Thalmann. Historically, you’ve been able to avoid rate base with the positive load growth, which seems to more than offset your operating expenses. But when we look at the earnings drivers for’14 versus ’13, the operating expenses are now leading your sales. So, I’m just curious, what type of earned ROE are you assuming in ’14, and are the operating expenses going to continue to create incremental regulatory lag until the timing when new rates go into affect?

Steve Buraczyk

Well, I think we are projecting revenue growth would be ahead of our O&M expense is what we’re hoping for. And then ROE, we had a one-item that you could see in our press release. We had an increase in other comprehensive income during the quarter. So we had a relatively large increase in our equity during the fourth quarter. But for that, the $2.30 at the midpoint of the range, you can see that’s a below 10% book ROE, that’s not a regulatory.

Brian Russo - Ladenburg Thalmann

And what’s the net book value of Four Corners have been, how should we think about the regulatory treatment if you were to sell that?

Steve Buraczyk

The net book price is currently approximately $25 million, is our net book value and that’s been depreciated at a relatively higher rate than our other plans and I think we anticipate it would be fully depreciated by 2016. The current rates we haven’t really still -- we will still not get it since the early 2016, so that’s the approximate.

Brian Russo - Ladenburg Thalmann

And what’s the tax rate you are assuming in 2014?

Tom Shockley

2014, we are assuming a 31.5%. We think that without loan appreciation, we will have some manufacturing credit that will help us during the quarter and then as ACDC growth up our tax rate for that.

Brian Russo - Ladenburg Thalmann

Okay. And then just lastly when looking at the trend in your peak load, it looks like 17 or 18, or 18 is flat to 17. On Slide 17, I’m just wondering, can you elaborate a little bit on that income growth, looks like 2,071?

Tom Shockley

I am sorry. I think I’m misreading it, Jeff, that’s the generation not the projected peak.

Brian Russo - Ladenburg Thalmann

So, I guess regarding to that question, are we seeing kind of an organic slowdown in the Fort Bliss as we’ve seen historically or that kind of trend trajectory still impacts?

Tom Shockley

We have enjoyed terrific growth at Fort Bliss over the last several years and although there is still construction going on out there, we don’t think that the peak loads will increase as much as it has in the past.

Brian Russo - Ladenburg Thalmann

Okay. Thank you.

Matt Fallon - Talon Capital

Hi, Matt Fallon with Talon Capital. Just been thinking about the 2017 average CWIP balance, can you give us some guidance on that?

Tom Shockley

I think if you look at the rate base slide on Slide 23, we actually give a projected year-end CWIP balance. So if you look at 2017, you will probably look at MPS 4 column and that’s your hanging CWIP balance there and if I can read this right I think it’s $244 million.

Matt Fallon - Talon Capital

So that’s the year end, I mean, is it kind of the $316 million plus $244 million, the average of those two numbers?

Tom Shockley

I am sorry. The units in MPS4 and is scheduled to soon come in the May-June timeframe of 2014. So obviously you have some ramp up from the end of the prior year up until the point where that goes into service and then the cost we anticipate in the plan. And obviously, the CWIP balance goes beyond that. I don’t think I might have answered your question more specifically. I don’t think it is easy as simple average of the numbers.

Matt Fallon - Talon Capital

Okay. So, should I look more towards $244 million, would that be?

Tom Shockley

For the end of year?

Matt Fallon - Talon Capital

No, for average ‘17?

Tom Shockley

I think if you are doing it on our math, on a weighted average basis, it’s probably going to be higher than that.

Matt Fallon - Talon Capital

Okay. And then the other question was just in terms of the New Mexico fuel filings, in the 2012Deregulated Palo Verde revenue, is there any update as to that filing and what’s happening in terms of that formula?

Tom Shockley

You are talking about the fuel continuation filing?

Matt Fallon - Talon Capital

Right.

Tom Shockley

That’s been approved and that was approved in January and the Palo Verde pricing mechanism processing market price was approved, but continued the mechanism we’ve been using for the last several years, a gas index times a heat rate, plus a 925 per month KW (inaudible).

Matt Fallon - Talon Capital

Okay. Thank you.

Anthony Crowdell - Jefferies

Anthony Crowdell from Jefferies. First I want to jump on the Neil’s question. You don’t have a breakdown between what the impact on the quarter was weather versus sequestration? And then the second question I had was I guess on -- David talk on when we get new rates in Texas, I am not sure if he said July or June, I know the slide says June. But I guess maybe I would phrase it as when those rates go into affect, what’s the benefit for the year, do you get like 60% of the benefit for a rate case or because I know you are more summer weighted, you get 65%, just trying to find out what the difference?

Tom Shockley

On the first issue Anthony is that both the government shutdown and the weather conditions in October occurred at about the same period. So we really do not have a clear breakdown what, how much was the weather related to the cooler October weather at same period that we have the higher summer rates and then the (inaudible).

David Carpenter

Yes. Anthony as it relates to the rates, we say June there. If you look at the pure 185-day period, it would put the rates into effect in June. I think for conservative reasons we have kind of generally assumed certainly it has an effect by July 1st. It’s really I think if you look maybe traditionally about 60% of the rate relief would probably be occurred after July 1st, but I want to caution that the allocation of where you put the rate increase is always a big debate and that your final rate design may shift more that to a different period or it may shift more of it into the summer. So that’s kind of maybe a historical ratio, but that doesn’t mean that’s going to be the result of the rate case.

Maury May - Wellington Shields

Yes. Maury May of Wellington Shields. Again on slide 23 which is the CWIP that they faced. I just want to make sure these columns are the end of ‘15, ‘16, ’17, right?

Tom Shockley

No, the columns represent...

Maury May - Wellington Shields

The only thing balance is millions for ‘15, ‘16, is that correct?

Tom Shockley

Yes, that is the only item that’s for the year end. That numbers that are in the schedule above that represent what rate base would be upon those units going into service.

Maury May - Wellington Shields

Right, okay. And then the 244 at the end of 2017, is just CWIP or the other general stuff, the non?

Tom Shockley

Yes, that’s the total.

Maury May - Wellington Shields

The non-generation, okay. And then just to, I might have missed the answer to this before, but page 30, this is a return to the weather question. Page 30 was cooling degree days were down 6.3% this year, that is year-over-year, right, that’s ‘13 over ‘12, is that correct?

Tom Shockley

Yes, correct.

Maury May - Wellington Shields

So what was it relative to normal if you give that number out?

Tom Shockley

It was probably at normal, so we saw an 8% decline in 2011 to 2012 and then another 6% in sales in 2013.

David Carpenter

2013 was about normal, including the three days.

Maury May - Wellington Shields

All right. Okay. Thank you.

Unidentified Analyst

Just a mix question, how much cash you are putting into pensions in 2014, ’15?

Tom Shockley

It would be about sub $15 million.

Unidentified Analyst

What you put in 2013?

Tom Shockley

‘13, I think we put (inaudible).

Unidentified Analyst

I guess I have got how you thought about this Board is coming and buying a company Tucson, what was your reaction when you heard that, or you probably knew about it that, how was your reaction anyway?

Tom Shockley

Well, we saw the (inaudible) buying earlier in the year and we do we have (inaudible) in our area of the company. I think there is some interesting advantages in both of those the way they apparently end up running them after they are through such that they -- for the most part they really independent, they take advantage of creating capital and some advantages on the debt. As far as management and the facilities pretty much stay intact. As we have looked at the M&A activity and opportunity, we have a very, very unusual regulatory environment that I think some of the ones that would like operational and would be very natural would probably have lot of headwinds from a regulatory perspective whether it’s C&M or Tucson is around the whole month I suppose. But the folks in El Paso city up which is the origin is fixed where we have to go are very -- they are very pleased that we are one of the only public businesses there. And so I think that it would be a lot of headwind in any kind of operation that change that anyway. But it wasn’t at premium they got.

David Carpenter

I will just make a comment about that. Those two transactions, one was good, one was not so good for shareholders. So follow the good one in case that ever comes about.

Unidentified Analyst

Nathan, I didn’t hear anything about equity, do you want to make comment about equity for the future?

Nathan Hirschi

Yes, we still want to think that we will not be soon -- we did not need any debt issuance, equity issuance to get through this.

Chris Ellinghaus - Williams Capital

The dividend payout, I am sorry, Chris Ellinghaus from Williams Capital. Dividend payout is a little on the low side relative to peers, is that -- for you is that a construction period payout or is that your real long-term thinking?

Tom Shockley

I think we’ll have to readdress that at the end of the construction period, that is like to report that every second quarter revenue for the construction period obviously that will change our net income I think.

Chris Ellinghaus - Williams Capital

Okay. The rate base slide, I will come back to you first let me. You’ve given us sort of benchmark to think about the New Mexico versus Texas rate base in the past, can you just give us an update on your thinking about New Mexico and Texas breakout for those numbers?

Tom Shockley

In terms of capacity?

Chris Ellinghaus - Williams Capital

Yes.

Tom Shockley

Yeah. I think, generally what you have to think about here is that, that because New Mexico has -- had a renewable portfolios standard and we felt about 15 megawatts of solar to meet the New Mexico rate base or to meet the New Mexico portfolio standard is what that does that get allocated first to New Mexico, so it reduces your need for rate base in New Mexico from other generating facilities.

And so in the past where maybe you have thought about New Mexico being at 24% to 25% of the total, probably because of the solar drops down more like 22% -- 21% to 22% of the total and so when we look at what’s likely happened, we are likely looking at significantly larger rate increase in, we see in Texas than we are in New Mexico.

Chris Ellinghaus - Williams Capital

Perfect. So nothing has really radically changed last couple of years in terms of your thinking?

Nathan Hirschi

More gradual.

Chris Ellinghaus - Williams Capital

Do you know what the book value for your ownership on Four Corners at this moment?

Steve Buraczyk

$25 million.

Chris Ellinghaus - Williams Capital

Okay. I take that.

Steve Busser

Operator, this is Steve Busser. It doesn’t look like we have any more questions in the room at this point, if there are any questions on the call, we will go ahead and take those at this time.

Operator

Thank you very much. (Operator Instructions) We’ll take our first question from Ashar Khan with Visium.

Ashar Khan - Visium

Hi. Good afternoon. Steve, could you just tell us because we really have been having this construction which is and then the rate increases that are going to come nearly a year after the plant come online which will I guess impact earnings because we are going to have more recovery of D&A and everything until the rate case? What is the earnings power from the rate base that you’ve given us on that slide? What is the earnings power of the corporation assuming you get that increases on that rate base? And based on the currently allowed ROEs that you have in the two jurisdictions? Can you just give us some sense of what the earnings power is, because I guess you’ll have to wait two years or probably 2017 to really get a bump in earnings, am I thinking to that correctly?

Steve Buraczyk

Ashar, this is Steve. I’ll give a portion of that answer then I will let David Carpenter add to that as well. I think from an earnings power perspective, if you look at the total rate base of the company after the first two units of $1.9 billion or so. Our targeted capital structure from a regulatory perspective is going to be in a 48% to 50% range for equity. And so, I think, if we -- we thought about of the half of that rate base being capitalized with the equity and look at returns that are being granted by commission in both Texas and New Mexico, probably in the 9.5% range at this time, that would give you a feel as it relates to where we think earnings are going forward. I don’t know, David, if you have anything you want to add to that.

David Carpenter

No. That sounds good. And then for timing, well, I think, what we would be seeing is that, as we said, we think that we could get right in effect in New Mexico by April of 2016 and June 2016 for Texas assuming the kind of the current expectation. And so that would give you a pretty significant portion of the rate relief in effect in 2016, probably a little bit more than half and then the rest of it in 2017.

Ashar Khan - Visium

Okay. But apart from the rate base, I should also be adding the quick balance, right, because you will getting some kind of earnings on that quick balance as well into earnings, is that correct?

David Carpenter

Sure. I think in addition to the quick balances, you are going to have earnings from Palo Verde 3 which has David mentioned in a little bit earlier in response to a question but we just got pay an approval from the New Mexico Commission to continue the pricing structure for Palo Verde 3. So if you are looking at a total earnings power to company outside rate case, I think, you are right, we are thinking about AFUDC earnings and Palo Verde 3 deregulated that.

Ashar Khan - Visium

Okay. Okay. Thank you so much.

Operator

(Operator Instructions)

Anthony Crowdell - Jefferies

What’s the earnings power at Palo Verde 3? Anthony Crowdell of Jefferies. The earnings power at Palo Verde? Last year, I think we had a refilling outage at Palo Verde 3, what’s that number at present?

Steve Buraczyk

I think, one way to put it, Anthony, is that your, Palo Verde 3 at current gas prices in New Mexico and I remember this is just a portion of Palo Verde 3 that current gas prices it is probably about breakeven, well, I say, current, I could say maybe the last month not current but in the $4 range, it’s about breakeven with the regulated returns, so if we have, I think we’ve, I don’t think we have put it on this slide but in past we have had, I would guess, $36 million of equity or investment in PV 3 then if half of that is equity and then your earning approximately regulated return on that so that would put you, I mean, we had 10% return only for that would put you at about $1.8 million. The contribution to net income.

Anthony Crowdell - Jefferies

(Inaudible)

Steve Buraczyk

Right. The gas prices are above the $4, what we have seen recently is probably a little bit 40%.

Steve Busser

And do we have any other questions waiting on the call?

Operator

No. No phone questions at this time.

Steve Busser

Okay. Well, thank you everyone…

Operator

Yeah. We do have one just came in, well, take a question from Rocky Bacchus from Efficiency Power.

Rocky Bacchus - Efficiency Power

I just like to ask Mr. Carpenter, what the probability of the CCN for the Montana 3 and 4 units?

David Carpenter

Yeah. I will be happy to answer that, maybe for full disclosure Mr. Bacchus has intervened in our CCN requirements for Units 3 and 4. I think that the likelihood of approval is very high and that we will probably see the approval of Units 3 and 4 at Montana Power Station probably, I think they have to approve by September, I think we will probably see it in the third quarter.

Rocky Bacchus - Efficiency Power

Thank you.

Operator

We have no further questions in the queue.

Steve Busser

Thank you all for joining us today. We enjoyed having you.

Tom Shockley

Hello, Ann?

Operator

Yes.

Tom Shockley

Yeah. We are done.

Operator

All right. Thank you so much.

Tom Shockley

Yes. Okay. Bye-bye.

Operator

This does conclude today’s conference. We thank you for your participation.

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El Paso Electric Co. (EE): Q4 EPS of $0.03 misses by $0.08. Revenue of $122.44M (-2.8% Y/Y) misses by $56.28M.