El Paso Electric's (EE) CEO Mary Kipp on Q2 2016 Results - Earnings Call Transcript

| About: El Paso (EE)

El Paso Electric Company (NYSE:EE)

Q2 2016 Earnings Conference Call

August 3, 2016 10:30 ET

Executives

Lisa Budtke - Director, Treasurer Services & IR

Mary Kipp - CEO

Nathan Hirschi - SVP & CFO

Analysts

Anthony Crowdell - Jefferies.

Andy Levi - Avon Capital

Brian Russo – Ladenburg

Operator

Good day, ladies and gentlemen, and welcome to the El Paso Electric Company's Second Quarter 2016 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I will turn the conference over to Lisa Budtke. Lisa, please go ahead.

Lisa Budtke

Thank you, Debbie. Good morning, everyone. Thank you for joining the El Paso Electric Company second quarter 2016 earnings conference call. My name is Lisa Budtke, and I'm the Director of Treasury Services & Investor Relations for El Paso Electric. On the call today are CEO, Mary Kipp; CFO, Nathan Hirschi; and other members of the senior management team.

Today, we will provide an update on our Texas and New Mexico rate cases, second quarter financial results, and our 2016 guidance and earnings drivers. You should have a copy of the press release in today's presentation. And if you do not, you can obtain them from our Web site on the Investor Relations page. We currently anticipate that our second quarter 2016 Form 10-Q will be filed with the Securities and Exchange Commission on or before August 5. A replay of today's call will be available shortly after our call ends, and will run through August 17. The details as it relates to the replay are disclosed in our press release.

For forward-looking statements on Page 2 of our presentation, you will see our Safe Harbor provisions. In summary, comments and answers to your questions may include statements that are not historical facts and thus constitute forward-looking statements. Such forward-looking statements involve known and unknown risk, uncertainties and other factors that may cause the Company's actual results in future periods to differ materially from the expectations stated here.

As the format of this presentation does not permit a full discussion of these risks, please refer to our Form 10-K, 10-Q or other SEC filings for a discussion of risk factors that should be considered. These filings may be obtained upon request from the Company, on our Web site or from the SEC. The Company cautions that the risk factors discussed in these filings are not exhaustive, 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.

Now I would like to turn the call over to Mary.

Mary Kipp

Thanks, Lisa. Good morning, everyone, and thanks for joining our call. I'd like to begin by discussing some of our recent highlights on Slide 3. First off, El Paso Electric Company became a coal-free utility after selling our 7% ownership interest in Four Corners. The sale of our ownership interest in Four Corners on July 6 not only allows us to become a cleaner utility but will limit our financial obligations relating to potential environmental regulations which of course benefit all stakeholders.

As a result of the sale, we will be able to reduce by one billion pounds the carbon dioxide from the Company's annual emissions. Our large-scale solar resources have also prevented an additional billion pounds of CO2 from being admitted into our atmosphere. To put this into perspective, the two-billion-pound reduction would be the equivalent of taking one 190,000 cars off the road or planting 20 million trees. So we're very proud of this.

Another reason to highlight is that we set a new native system peak of 1,892 megawatts on July 14, 2016. This new peak surpasses our 2015 record peak of 1,794 megawatts by 5.5% or 98 megawatts. The continued growth in our region and the recent streak of hot weather has resulted in the Company exceeding last year's peak on eight days this year. We set a new native peak record in 11 out of the last 12 years. As a result we continue to plan diligently to add generation resources to meet the needs of our service territory in a safe and reliable manner.

We are also in the process of reviewing several proposals for demand response programs which are designed to enable customers to reduce their load during peak demand. Regarding our New Mexico rate case, the New Mexico Public Regulation Commission issued a final order on June 8, approving an annual increase of approximately $1.1 million. With respect to our Texas rate case, on July 21, 2016, we filed an unopposed settlement with the Public Utility Commission of Texas after continuing to work with all interveners in the case.

Another highlight that I'd like to mention is the construction of Montana unit four. It remains on schedule and we still anticipate placing that unit into commercial operation in September of 2016. Together the four Montana units will add 352 megawatts of clean burning natural gas to our local fleet of electric generation and will provide enough energy to meet the needs of more than 160,000 homes in our growing service territory.

Finally, I'd like to mention that the Company recently began discussions with our union employees to negotiate a new collective bargaining agreement. The Company's partnership with the International Brotherhood of Electrical Workers Local 960 continues to be positive and constructive and we look forward to building upon this successful relationship as we work together to serve our region.

At this time, I would personally like to thank our dedicated men and women who work to keep the lights on during extreme weather conditions. This is exemplified by the efforts of our employees who worked to restore power during the recent wind storm that hit our region. The pictures on Slide 4 show some of the damage caused by the July 15 wind storm. The massive wind storm produced microbursts and wind gusts exceeding 60 miles per hour. These winds caused damage to multiple transmission and distribution lines alongside the heavily trafficked interstate, which left thousands of customers without electricity.

As a result, our employees were dispatched to the location and they were tasked to restore electricity to those customers, working in conditions with low visibility and temperatures exceeding 100 degrees. As they've done time after time, they successfully restored power and they continue to work tirelessly and safely to maintain our grid stability and for that, we thank you.

Turning to Slide 5, I will discuss the latest developments on our Texas rate case filing in more detail. The company filed an unopposed settlement with the Texas Commission on July 21, which calls for an annual non-fuel base rate increase of $37 million and an additional $3.7 million for costs related to the Four Corners plant. Other key terms of the settlement agreement are the lowering of annual depreciation expense by approximately $8.5 million and setting the return on equity for AFUDC purposes at 9.7%. Part of the settlement was a determination that substantially all new plant in service was reasonable and necessary and therefore should be included in rate base.

Finally, recovery for most of the rate case expenses up to a date certain was agreed upon as well as removing the proposed surcharge for residential customers with solar generation. The cost of serving these residential customers will be addressed in a future proceeding. Approval by the Commission would resolve the rate case, including the revenue requirement issue for Four Corners and rate case expenses. We anticipate that our proposed order will be considered by the PUC on Thursday, August 18. Once approved, we will record the effects of the settlement for financial reporting purposes.

Turning to Slide 6; in New Mexico on June 8, the Commission issued a final order approving an annual increase of approximately $1.1 million. The terms of the final order deviated from the hearing examiner's previous recommendation by reducing the rate base offset for the pension and benefits liability, reducing the return on equity to 9.48% and disallowing several smaller cost of service items. All plant in service was deemed reasonable and necessary. These new non-fuel base rates became effective on July 1 of this year. Some details regarding the ability to recover certain past pension and benefits costs remain unresolved. So the Commission has initiated a separate show cause proceeding regarding the unfunded liability for other post-employment benefits and that's ongoing.

I would now like to walk into a potential timeline for our next round of rate cases. As you can see on Slide 7, our time line remains on schedule for placing Montana unit 4 in service by September 2016. In New Mexico, the company anticipates filing a rate case in the first quarter of 2017 using an historical test year ended September 30, 2016. A final order on new rates are anticipated to take effect during the first quarter of 2018.

Looking at the Texas timeline, we also anticipate filing our rate case in the first quarter of 2017 using an historical test year ended September 30, 2016.

Our timeline reflects a potential final order to be issued during the first - fourth quarter of 2017. As you know, due to legislative changes, we have the ability to surcharge customers for new rates relating back to consumption beginning on the 155th day after the rate case is filed. This means the effective date for new rates could be as early as the third quarter of 2017, even if the schedule for the rate case were to be extended. It's important to note that the impacts of the rate case will be recognized for financial reporting purposes after a resolution is reached.

I would now like to turn the call over to Nathan, who will walk you through the details of our second quarter financial results.

Nathan Hirschi

Thank you, Mary. As you can see on Slide 8, for the second quarter of 2016, we reported net income of $22.3 million or $0.55 per share, compared to 2015 net income of $21.1 million, or $0.52 per share. Turning to Slide 9, I would like to walk you through the key earnings drivers for the second quarter. Beginning with the positive earnings drivers, net income for the quarter was positively impacted by increased retail non-fuel based revenues which resulted in increased earnings per share of $0.05. The increase was primarily due to increased revenues from residential and small commercial customers resulting from 1.5% increase in the average number of customer served and warmer weather. Investment and interest income also had a positive impact on earnings due to higher realized gains on securities sold from our Pella Verde decommissioning trust fund which benefited the quarter by $0.04 per share as compared to prior year.

Turning to the negative drivers; earnings declined by $0.03 per share due to interest accrued our $150 million of senior notes issued in March 24, 2016. Earnings were also negatively impacted by $0.01 per share due to higher depreciation expense associated with an increase in perishable plant including Montana Units 3 which was placed in service in early May 2016. Changes in our effective tax rate also decreased earnings by $0.02 per share during the quarter due to a reduction in the domestic production manufacturing deduction and changes in state taxes.

If you will now turn to Slide 10, we have provided a comparative analysis of changes in retail non-fuel based revenues in megawatt hour sales by customer class for the second quarter of 2016 compared to the same period in 2015. Total retail megawatt hour sales increased by 1.1% while total retail non-fuel based revenues increased by 2.1% during the second quarter of 2016. As noted earlier, the increase in retail revenues was primarily driven by an increased revenue from residential small commercial customers due to 1.5% increase in the average number of customer served and warmer weather observed during the second quarter of 2016.

On Slide 11, we have illustrated how weather had an impact on our second quarter revenues; cooling degree days for the second quarter of 2016 increased by 3.9% when compared to the same period in 2015 but remained below the 10-year average by 6.4%. Although the month of June still came in 3% below the 10-year average for total cooling degree days, a stretch of hot weather in the middle of the month including 108 degree day on June 18, resulted in record peaks and solid megawatt hour sales.

As observed throughout most of the Central and Southern United States during the first weeks of July, our region experienced numerous consecutive days with above average temperatures. During July the region experienced 16 consecutive days of triple-digit temperatures which also contributed to the establishment of the 1,892 megawatt native load peak that Mary mentioned earlier.

Turning to Slide 12, I will briefly discuss are capital requirements and liquidity. During the first six months of 2016, our capital expenditures for additions to electric utility plant were $103 million. On July 21, our Board declared a quarterly cash dividend of $0.31 per share which is a 41% increase since the dividend was reinitiated in 2011. In total, the company paid $24.5 million in dividends during the first six months of 2016.

On June 30, 2016, our liquidity was $207.5 million which consisted of a cash balance of approximately $10 million plus borrowing capacity available to us on our credit facility. In total we expect to spend approximately $234 million for capital expenditures in 2016.

Turning now to Slide 13, now that we have received a final order in the New Mexico rate case and have filed a non-opposed settlement for our Texas rate case, we are initiating 2016 earnings guidance at the range of $2.20 to $2.50 per share. The middle of the range assumes normal weather and non-fuel base rate increases for Texas of $40.7 million consisting of $37 million plus, an additional $3.7 million for Four Corners cost and lower annual depreciation expense of approximately $8.5 million.

The assumption is that the Texas Commission will approve the unopposed settlement in the second half of the year and the resulting impact for all but 11 days would be recognized in 2016. Guidance includes approximately half of the $1.1 million non-fuel base rate increase for New Mexico which became effective on July 1, 2016. These increases were - are offset by earnings drivers that will be discussed on Slide 14.

There are several factors that will negatively impact earnings in 2016 as compared to 2015. Most of the negative drivers are directly related to regulatory lag associated with Montana Units 3 and 4, and the related financing costs. The primary components of regulatory lag or higher property taxes, lower AFPDC increased O&M, depreciation expense and interest expense. In 2016 regulatory lag associated with Montana Units 3 and 4 is expected to be approximately $0.15 per share.

Other factors that are anticipated and negatively impact earnings include a higher effective tax rate which is estimated to be approximately 36% for 2016, a return to more normal weather and a decrease in investment and the interest income. Year-over-year earnings will be positively impacted by that rate increases in Texas and New Mexico that we discussed on Slide 13, as well as continued customer growth.

At this time I would like to turn the call back over to Lisa.

Lisa Budtke

Thanks, Nathan. This concludes our second quarter 2016 earnings presentation. Before we open the call up for questions, I want to mention that management is trying to meet with investors at New York on August 11, 12, and 15. And we'll also be meeting with investors in Baltimore and Philadelphia on August 16. Please contact Investor Relations for additional information and meeting dates. Debbie, please open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first call today from Anthony Crowdell with Jefferies.

Anthony Crowdell

Good morning. I guess first question I have is, you took a $0.05 benefit for retail non-fuel based revenues, is that - could you break out what portion of that is growth and what portion is related to weather?

Nathan Hirschi

It was - we don't think it was - really significant amount of that was weather. We actually had a quarter that had - the weather was actually below average. So it was a slight improvement from last year. So there was some amount of an improvement year-over-year from weather but again it was a below average quarter for weather. So a significant portion of that is really customer growth.

Anthony Crowdell

Okay, what's your benefit - I'm sorry. What is your assumption in 2016 guidance for NDT gains for the rest of the year?

Mary Kipp

We're still anticipating that year-over-year it's going to be less than what we booked last year.

Nathan Hirschi

So for this quarter it was actually a little bit benefit over last year but for the remainder of the year it will be little bit less than last year.

Anthony Crowdell

Okay. The other question I had was just some housekeeping. In your income statement, and maybe I'm mixing up companies, it looks like you've eliminated or combined I should say the line items where you previously broke up Palo Verde 3, the proxy revenues on Palo Verde 3, and also you said differentiating Nuclear O&M from Regular O&M. You've now consolidated all of that? Is that accurate?

Nathan Hirschi

Well, that's a good point, Anthony. We did change our - on our press release, we did go to a GAAP presentation in the press release as opposed to what had previously been a EBITDA-focused income statement in the press release. And - those other information, I believe it's available in the Palo Verde 3 revenue is partially available on the waterfall table and then - the change, at least, is. And then it will - that will be broken out in the 10-Q also.

Anthony Crowdell

And could you just then - what's in the Other operations bucket and what's in the Maintenance bucket?

Nathan Hirschi

I'm sorry, Anthony, what -

Anthony Crowdell

On the income statement, there's an Other operations number and there's Maintenance.

Nathan Hirschi

That's just the first classification between operations expense and maintenance expense. Maintenance is purely what meets the first [ph] definition of maintenance and then everything else goes into Other, except for fuel.

Anthony Crowdell

Okay. Your guidance for 2016, you assume normal weather, but like you said, July was really hot. Is it normal weather and I know this may be more granular than you want to talk but is it normal weather from today, from now until the end of the year or from July 1 because it seems that we had a little headwind with a very warm July.

Nathan Hirschi

It's really more normal weather from here on out, although we point out Anthony that we had a very solid third quarter last year when it comes to revenue growth and remember we had a $14 million year-over-year increase last year in the third quarter. So we had such a good year last year that in the third quarter that's what's making us a little tempered about what the revenue growth is going forward from here.

Mary Kipp

And just you know, Anthony, from August to September we had record cooling degree days last year.

Nathan Hirschi

Yes, so we had a really solid end of the third quarter last year.

Anthony Crowdell

My last question - I'm sorry, Nate.

Nathan Hirschi

But you are right, we are ahead of - July was well ahead of where we were last year at this time.

Anthony Crowdell

My last question, and I'll jump in the queue to get someone else's. This year, you gave - obviously 2016 guidance came out today because of the delay in the rate decisions. You know next year we're going to be in a similar position where you're going to have a pending New Mexico and Texas rate proceeding going on. Is there a thought to going back to issuing 2017 guidance or annual guidance earlier in the year? Or next year we're going to be in the same position where it doesn't come until much later in the year.

Nathan Hirschi

So we'll have to work through that at that time. The first round of rate cases, these provided a greater degree of uncertainty than perhaps some as we go forward, as these were the first ones we filed in a few years. But we'll have to really see how the situation goes and make that decision later. We know that you guys, the investment community, would prefer us to get out early. We'll strive to see if we could do that.

Anthony Crowdell

Great. I'll jump back in the queue. Thanks again.

Operator

We'll go next to Andy Levi with Avon Capital.

Andy Levi

Hi, good morning. How are you guys doing? Couple questions Just on the O&M for the year. Can you quantify the negative impact that you're forecasting?

Nathan Hirschi

So it's about the additional O&M associated with was truly the Montana unit 3 is approximately -

Mary Kipp

So we said - what we said, Andy, is for units 3 and 4 we really don't see that - for MPS units, we really don't see a large increase happening for those two units compared to when MPS units 1 and 2 came on line. However, some of this is due to regulatory lag for those two units.

Andy Levi

Right. I'm just trying to understand, because you have O&M as a negative driver for this year but you also have a benefit? Don't you have a benefit from Four Corners in the…

Nathan Hirschi

Well, we do. Yes. Four Corners will…

Andy Levi

I'm just trying to see what the kind of the net effect of that is.

Nathan Hirschi

Overall, the offset for Four Corners will benefit us but it won't quite offset the overall trend, the upward trend on O&M.

Mary Kipp

And you have to remember that we did push the Four Corners outage from the last part of last year into this year, and this is representing a full year as O&M.

Andy Levi

Okay. Which we'd strip that obviously next year. Okay. And just on investment and interest income. Okay, a negative driver, you kind of talked about it a little bit, which I guess was all the NDT. Can you quantify that amount or not? Like is it $2 million less or…

Mary Kipp

So right now what we're anticipating for a reduction in investment and interest income is about $0.04 year-over-year.

Nathan Hirschi

For the year as a whole.

Mary Kipp

That's right.

Nathan Hirschi

It benefited this quarter.

Andy Levi

And is that just a function of just lower interest rates, or how - what is that a function of?

Nathan Hirschi

It's just the amount of activity that's currently going on in the portfolio. The amount of transactions in the core balance. We're rebalancing the portfolio to some extent, which is over a period of time, which is triggering some gain.

Andy Levi

Okay, and then on the effective tax rate, which we did expect to go up next year to 36%. I guess we thought it was going to be a little bit lower this year, but I guess it's going to be the full 36%. And statutory rate. Is that - was that a surprise? Not really a surprise to you, but we had it a little bit lower. Was that anticipated at the beginning of the year that it was going to be 36% or did something happen to increase it by a few, you know, 200 basis points or something?

Nathan Hirschi

No, that's what we anticipated, is about 36% from the beginning. That's, again, with the bonus depreciation, the manufacturing credit we no longer are allowed to accrue, that really pushed us up. And plus the mix between some of the decline in FUDC causes a little higher percentage of our income to be taxed at the full rate. So yes, you know, that was kind of expected.

Andy Levi

And that's kind of the number we should use going forward?

Nathan Hirschi

Yes.

Andy Levi

Okay, which is what we're doing. And then the last question just relates - and again, I know you haven't given 2017 guidance, but assuming a reasonable outcome in your next rate proceeding, and I know you're still trying to get the final order here. We should expect - and timing of that, of course - we should expect growth in 2017 off of 2016 of some sort. Is that correct?

Nathan Hirschi

Yes, that's right. We're - I think one of the solid takeaways from the quarter was the revenue growth that we saw, and kind of the mix of sales that went toward that. So we're seeing solid revenue growth and I think the residential KWBH grew by 5.9%, so very solid. And we're seeing a 1.5% customer growth. So we are seeing very solid - and then hopefully the rate cases, by the end of next year, we'll see the next round of rate cases toward the second, in Texas, toward the second half of the year. So we'll see both continued customer growth and hopefully we can resolve the rate cases next year in order to see some - the effects of the next round of rate cases.

Mary Kipp

With that said, Andy, of course the more normalized year for earnings is going to be 2018.

Andy Levi

Right. I understand. And then at some point, do you anticipate, have you contemplated, giving a dividend and earnings growth rate once we get through these rate cases, or this rate case, or just kind of your thinking on that?

Nathan Hirschi

Yes, we'll continue to look at that, probably getting through the next round of rate cases, we'll get a little bit more clarity on the longer-term trend. And again, given the - these rate cases very close together, we've been a little cautious about that. But we will work toward that goal.

Andy Levi

Okay, I think that's it for me. If I have another question, I'll get back in the queue. Thanks very much.

Operator

[Operator Instructions] We'll go next to Brian Russo with Ladenburg.

Brian Russo

Hi, good morning. I just want to understand the 2016 guidance in more detail. So it assumes the new rates in Texas as of April 1, is that accurate? Because the 155 look back, aren't you amortizing that over a period of time?

Nathan Hirschi

Well, it actually assumes the revenue to come, be effective, as of January 12. We'll be able to record that at the time that we get a final order or a resolution of the rate case. And we will collect it over a period of 18 months.

Brian Russo

Okay, so you -

Nathan Hirschi

12 months from the date, so 18 months from that start date, so it's 12 months.

Brian Russo

So GAAP earnings will reflect the revenue as of January 12, which is in your guidance, but cash flow will reflect the actual collection period? Is that how it goes?

Nathan Hirschi

That's right. And of course, for the interim rates, we've already collected that cash, so that - or we've collected a good portion of that cash since April 1. So we have been collecting the interim rates, but the relate-back revenues will be collected over a 12-month period.

Brian Russo

Okay. Are there any costs incurred for the storm restoration, included in your guidance?

Nathan Hirschi

Just the normal O&M; we made - that wasn't a significant - we have - it didn't incur any significant costs. It was just a, we felt, a highlight a period of excellent work from our crews.

Mary Kipp

Yes, I would add to that. This is just storm season for us, so this is just part of the normal course.

Brian Russo

Okay. And also, just to kind of back into an earned ROE based on the midpoint of your guidance. It looks like it's somewhere between 7% and 8%? Is that accurate? And as we move forward into 2017 and 2018, we should see ROE improvement, correct?

Nathan Hirschi

That's right. I mean, that's the period of regulatory lag, when we don't have the - like we mentioned, the regulatory lag. You're right, that is what the ROE won't be for the year at midpoint of guidance, where we would expect to be in the longer term because of the period of regulatory lag. You're absolutely right.

Brian Russo

Okay, so - but, it's strange that you're using Texas rates as of January 12, yet you're still experiencing all this lag. I'm a little confused by that.

Mary Kipp

That's more related to units 3 and 4, and we quantified that on Slide 14, Brian, that we anticipate that regulatory lag related to those two units is going to be approximately $0.15 on a year-over-year basis.

Brian Russo

Right. Okay, so that gets captured in the next round of general rate cases for almost a full year in 2018.

Nathan Hirschi

And that's why we intend to file again on both the rate cases in January of next year.

Brian Russo

Okay, understood. And also, the midpoint of guidance captures July weather?

Nathan Hirschi

Yes, it does. And again, we had slightly below normal weather in the first half of the year.

Brian Russo

Okay, got it. And then, just lastly, I'm not sure if you have this information, but what's the earnings from Palo Verde 3 sales embedded in the guidance? That's tied to the Permian Basin gas processing price, I guess?

Nathan Hirschi

It's - we do see a slight increase over what - so looking over a year, we're seeing a slight increase in the projected gas prices over the next year. So there's a slight pickup due to the PV3 earnings -

Brian Russo

I'm sorry, could you repeat that?

Nathan Hirschi

I believe it's a - do you have that, Lisa?

Lisa Budtke

Yes…

Brian Russo

Do you know what the PV3 earnings contribution was in your 2015 actual?

Lisa Budtke

Like Nathan said, it's about a penny per share, year-over year, increase compared to prior year.

Brian Russo

Got it. Thanks.

Lisa Budtke

It's actually a decrease of a penny year-over-year.

Nathan Hirschi

It's about $9 million, is the PV3 earnings. That's kind of the range.

Brian Russo

Okay, and also, can you quantify what the Four Corners planned outage expense was in 2016?

Lisa Budtke

I believe we said that was anywhere between close to $4 million that we pushed from the fourth quarter of 2015 into the first quarter of 2016.

Brian Russo

Okay, and that's pretax? That's $4 million in expense, right?

Lisa Budtke

Yes, pretax.

Nathan Hirschi

And that was largely recognized in the first quarter, one of the reasons why we had a relatively in the first quarter.

Brian Russo

And are there any Four Corner outages next year? In 2017?

Nathan Hirschi

Well, thank goodness, no. since we got rid of the Four Corners, that's no longer an expense that we'll have to worry about. And that's one of the nice trends from an O&M perspective.

Brian Russo

Okay, great. Thank you very much.

Operator

We'll now take a follow-up from Anthony Crowdell from Jefferies.

Anthony Crowdell

Hey, I wanted to jump on one of Andy's questions on tax rate. I think you stated 36% roughly in 2016 and 2017. When we think of 2018, if it's 36% that should be fully reflected in the new rates that you get in Texas and New Mexico?

Nathan Hirschi

That's right. So we'll file - we file the rate cases with normalized state taxes, so they - it'll be close to the 36% that we'll be filing for.

Anthony Crowdell

And, lastly, if I remember correctly, you guys are filing for historical - based on historical test year in New Mexico? I guess I'm looking at Slide 7, you're filing based on historical year end in New Mexico. Why not use the forward-looking test year there? I mean, this case looks like it's a little easier than your last case. You didn't get a great - I mean, my opinion, you didn't get a great decision or balanced decision on your last proceeding. Why not go with a forward-looking case and minimize lag or have to go back in?

Nathan Hirschi

We'll continue to analyze that. Our situation that we're seeing load growth kind of makes the benefits of a forward test year not quite as obvious. Plus, we think it's easier to file and more simplistic to file a historic test year. So those are the - really, the two things is the - we think it adds in the process of filing, and with the relatively solid customer growth and load growth that we're seeing, it takes away some of the advantages of a forward test year.

Anthony Crowdell

And just lastly, and I maybe will not be able to quantify it: the type of percentage increase - I mean, will you be a single-digit percent rate ask, or when you're requesting an increase in New Mexico and Texas?

Mary Kipp

Anthony, it's Mary. I'll speak to that. Obviously, we won't know that until our expert does the analysis, but we will try to file for the highest one that we feel is reasonably justified.

Anthony Crowdell

Thanks, Mary. Great. That's all I have. Thank you.

Nathan Hirschi

Thanks, Anthony.

Operator

And we'll go next to Andy Levi with Avon Capital.

Unidentified Analyst

Hi. This is Gill. How are you? Just a follow-up on the $8.5 million of lower depreciation from your settlement. Do you recoup that from January 12 once the PUC signs the order? Or you get the lower depreciation from the date when they sign the settlement?

Nathan Hirschi

No, you're right. We would go back and adjust the depreciation since January 12. So we would be able to go back, it's in the stipulation that we'll move back the depreciation rates to the effective date, the January 12 date.

Unidentified Analyst

Okay, so it works similar to the rate increase. I understand. And secondly, so on your earning guidance for 2016, what will take you to the high end, except for the weather?

Nathan Hirschi

Well, the primary factor is the weather, there's some O&M trends that would get u there toward the high end. The biggest factor is the revenue side, which is the biggest factor and why we really have - the third quarter is obviously the biggest earning quarter, and so this would - the weather in this quarter is the single biggest factor from between the high end and the lower end of guidance.

Unidentified Analyst

Okay, get it. Thank you very much.

Operator

Ladies and gentlemen, with no questions in queue, I would like to offer everyone one final opportunity. It is star 1 if you'd like to ask a question. We'll pause just a moment. And there are no other signals at this time.

Lisa Budtke

Okay, thank you for joining us on today's call. Have a great day and please be safe.

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