El Paso Electric Co. (EE) CEO Mary Kipp on Q2 2018 Results - Earnings Call Transcript

El Paso Electric Co. (NYSE:EE-OLD) Q2 2018 Results Earnings Conference Call August 2, 2018 11:30 AM ET

Executives

Lisa Budtke - Director, Treasury Services and IR

Mary Kipp - President and CEO

Nathan Hirschi - CFO

Analysts

Elizabeth Guynn - Mizuho

Julien Dumoulin-Smith - Bank of America Merrill Lynch

Andrew Levi - ExodusPoint

Vedula Murti - Avon Capital

Chris Ellinghaus - Williams Capital

Operator

Good day, and welcome to the El Paso Electric Company’s Second Quarter 2018 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Lisa Budtke. Please go ahead, ma’am.

Lisa Budtke

Good morning, everyone, and thanks, Chantelle. Thank you for joining the El Paso Electric Company’s Second Quarter 2018 Earnings Call. My name is Lisa Budtke, and I’m the Director of Treasury Services and Investor Relations. On the call are President and CEO, Mary Kipp; CFO, Nathan Hirschi, and other members of senior management. You should have a copy of our press release and today’s presentation. And if you do not, you can obtain them from our website.

We currently anticipate that our second quarter Form 10-Q will be filed with the Securities and Exchange Commission on Friday, August 3. We would also like to inform you that we will be participating in the Bank of America Merrill Lynch 2018 Texas Power and Utilities Conference on September 27 in Dallas. Please refer to our website for all upcoming Investor Relations events. A replay of today’s call will be available shortly after our call ends and will run through August 16. The details as they relate to the replay are disclosed in our press release. For forward-looking statements on Slide 2 of our presentation, you can see our Safe Harbor provisions.

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 risk 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 based on management’s current expectations and is qualified by reference to the risks and factors discussed in the company’s SEC filings.

Our annual report on Form 10-K and other SEC filings contain our forward-looking safe harbor statements and also lay out the risk factors that should be considered. These filings may be obtained upon request from the company on our website or from the SEC. The company cautions that the risk factors and others discussed in the company’s SEC filings are not exhaustive, and we do not undertake to update any forward-looking statement. And any such statement made during the call are subject to such risk and other factors.

On Slide 3, in addition to disclosing financial results that are determined in accordance with generally accepted accounting principles or GAAP, the company has provided adjusted net income and adjusted basic earnings per share, which are non-GAAP financial measures. Management believes that providing this additional information is useful to investors in understanding the company’s core operating performance because it removes the effects of variances that are not indicative of fundamental changes in the earnings capacity of the company.

Slide 3 contains a description of our use of the non-GAAP measures and Slide 12 provides a reconciliation of these non-GAAP measures to the most comparable GAAP measures. Now I’ll turn the call over to Mary, who will start on Slide 4.

Mary Kipp

Thanks, Lisa, and good morning, everyone, and thanks for joining us. For the second quarter of 2018, we are reporting net income of $33.3 million or $0.82 per share. This compares to net income of $36.1 million or $0.89 per share for the second quarter of 2017. After removing the realized and unrealized net gains on equity securities, adjusted net income was $30.8 million or $0.76 per share for the second quarter of 2018, compared to adjusted net income of $31.9 million or $0.79 per share for 2017. Although Nathan will discuss the key earnings drivers to the quarter in more detail, I’d like to take some time to briefly discuss the higher levels of operations and maintenance expense occurred during the second quarter as well as the new initiative for generation.

Turning to Slide 5, as we prepare to add new resources and technologies to our generation fleet, we want to make sure that our maintenance program is geared towards providing high levels of fleet reliability in the most cost-effective way possible. Thus, we recently implemented a new, more holistic program in our power generation group to provide those higher levels of reliability while taking a longer-term view of operations and maintenance expenses. This approach includes shoring up our predictive and preventative maintenance policies. We believe the current window between prior and future generation build outs is the optimal time to focus our resources on this type of work. We will also combine the responsibilities of our power generation department with our system operations and resource planning and management team under EPE Vice President David Hawkins, who has over 20 years of experience in the electric utility industry here at El Paso Electric and elsewhere. We believe this new combination enhances coordination among the various operational groups.

As a result of this new strategy, we recorded higher outage costs during the second quarter with an understanding that this should reduce cost over the longer term. The biggest part of the cost increase relates to our decision to proactively perform additional work on Newman Unit 2 which was previously scheduled to be done in 2019 and 2021. More specifically, while repairing a rotor during a forced outage, we decided to incur additional costs upfront to immediately enhance the safety and reliability of the unit, which is expected to also reduce the maintenance expenses planned for the unit in years 2019 and 2021.

Using the new approach to the unit, the Newman Unit 2 as an example, we estimate that proactively performing additional work now, rather than on the time line previously planned will result in a net savings and planned O&M expense of over $1.3 million over the period from 2018 to 2021 for the unit. Any additional reliability created by doing this work now also reduces the likelihood of unforeseen expenses caused by additional forced outages of the unit.

This decision illustrates our strategy to look longer term at ways to maximize fleet reliability while reducing O&M expenses. Moreover, the reliability of existing generation is central to the decision we will make on those generation resources that are needed in the future. In this way, this shoring up of existing generation enhances our ability to make prudent decisions for our customers and shareholders. We believe that in the long run, our new approach will help ensure we are better prepared to meet the growth of our service territory, not only safely and reliably, but with a lower level of forced outages and the expenses associated with those outages.

I had the privilege of spending time yesterday with my fellow employees at both the Newman and Rio Grande plant. I could not have been more impressed with the level of dedication, care and thoughtfulness with which the team has embraced our new approach. So before moving on, I wanted to thank plant managers, Jamie Viramontes, David Aranda and Albert Montano, and all of the employees at our plants for their hard work, not only during our summer run, but also in finding ways to continue to enhance reliability while decreasing our operations and maintenance costs over the longer term.

If you’ll turn now to Slide 6. I will go over some of our recent highlights. On May 24, our Board increased our quarterly cash dividend by $0.025 or 7.5% to $0.36 per share. On June 28, the company issued $125 million of 10 year senior unsecured notes at 4.22%. On the same day, the company guaranteed the issuance of $65 million of 7 year senior unsecured notes by the Rio Grande Resources Trust at 4.07%.

As a reminder, we finance our portion of nuclear fuel for Palo Verde through the trust. The net proceeds from the sale of these senior notes were used to repay short-term borrowings under our revolving credit facility. On the operational front, we achieved a new kilowatt hour sales to record during the second quarter. Our kilowatt hour sales were 4.2% higher than the previous record for a second quarter.

With respect to our large scale solar projects, we are pleased with the progress at the Holloman Air Force Base Solar Facility. The facility was energized for commissioning and testing purposes on July 25, and we anticipate it becoming commercially operational within the next several weeks. We are currently seeking regulatory approvals for New Mexico Community Solar Facility, which would add 2 megawatts of clean and renewable generation to our portfolio. In Texas, we are also seeking regulatory approval to assign an additional 2 megawatts of our current generation to the Texas Community Solar Program.

Turning to Slide 7. El Paso Electric has recognized the need to communicate and make public our efforts and achievements regarding environmental and corporate sustainability initiatives. Consistent with our culture of corporate responsibility and environmental stewardship, we will be issuing our first corporate sustainability report later today, and it will be available on our website.

The report demonstrates our commitment to transparency with regards to environmental, social and governance sustainability performance. I’m proud of our achievements and strategic approach toward protecting the environment and supporting our community. We look forward to continuing to work with our regional leader towards a common goal of meeting the needs of our expanding communities in a safe and environmentally conscious manner.

To lead this effort, we’ve created a Director of Sustainability position. I would like to take this time to recognize Linda Barker, Jessica Christianson and Teressa Soto for leading this collaborative effort to create our first sustainability report on behalf of all of us at El Paso Electric. This report demonstrates the commitment by all El Paso Electric employees to engage in sustainable practices as we navigate a period of continued growth in our service territory.

On Slide 8, you will see that our region continues to grow and prosper, as evidenced by numerous significant investments planned for the El Paso area. Of note, our downtown skyline is expected to grow with the addition of a modern 18 story, $85 million office tower that will serve as the headquarters for WestStar Bank. This new building will be the first high-rise office building to be built in downtown El Paso in 40 years. This state-of-the-art tower is expected to open sometime during the fall of 2020. Our city’s downtown revitalization efforts continue to progress as well. We’ve seen an increase in the number of new hotels opening up in our downtown. In fact, it is projected that by the end of this year, the number of hotels and hotel rooms in downtown El Paso will double over 2015 levels.

We also have some major capital improvements announced by our regional school districts. The Socorro Independent School District alone received overwhelming approval from voters in 2017 to issue $448 million in bond projects to accommodate growth. We view these projects as a confirmation that our region is undergoing a robust and thriving period of economic prosperity. As our communities grow, it is also important to maintain an adequate transportation system. The Texas Department of Transportation recently provided the city with a review of the projects that are either underway or planned for the future. This plan includes improvements and additions in almost every sector of the city and the combined total of these projects is approximately $430 million. The City of El Paso is also adding to the robust capital expansion by approving $94 million in capital improvements this past May.

Turning to Slide 9. You can see that we are in the process of engaging our regional stakeholders regarding smart community initiatives. These initiatives would allow us to take advantage of new technologies that would enhance grid resiliency and operations. They would also allow the company to provide expanded services, such as smart pricing options, high usage alert, online energy management, preventative maintenance and potential low-income customer benefits. We look forward to seeking legislation during the upcoming legislative session in Texas, which convenes in January 2019. The new legislation will provide some clarity regarding the implementation of advanced metering infrastructure in our service territory, which is the backbone of smart community initiatives. Ultimately, we would like to be in a position to seek regulatory approval for these initiatives in Texas and New Mexico in 2020.

Turning to Slide 10. I will provide an update on the All Source Request for Proposals we issued in 2017. As we continue to evaluate these proposals, we have decided to conduct additional analysis which will help us solidify our decision to select the optimal addition of new resources and technologies to our current fleet for the benefit of our customers. Due to the number of options and bids submitted, the complexity of the bids and technologies and the costs associated with the proposed options, we believe it is prudent to allow additional time to perform further analysis. We also believe it will be beneficial throughout the various regulatory approval processes required to add new resources, and ultimately, to seek recovery of these costs associated with those resources. To provide time for the analysis, we have decided to make a slight modification to our time line. We now anticipate that a final decision on the RFP will be made in late 2018 instead of the third quarter this year. Although the time line to make the decision is changed, the time line to deploy the resources should not be impacted. Once a final decision is made regarding the RFP, a revised capital expenditures forecast will be provided.

If you’ll now turn to Slide 11, Nathan will cover our second quarter earnings drivers.

Nathan Hirschi

Thank you, Mary. Starting with the negative drivers. Earnings declined by $0.10 per share due to the $5 million of Palo Verde performance rewards, which we recorded in 2017, with no comparable activity in 2018. As previously mentioned, Palo Verde performance rewards are typically recognized every 3 years, so we didn’t have a corresponding benefit this year. As Mary previously mentioned, O&M expense increased at fossil fuel generating plants, which decreased earnings by $0.09 per share. The increase in O&M is largely attributable to the outages at Newman Units 2 and 4 and Rio Grande Unit 8. These increases were partially offset by outages -- outage costs incurred at Newman Unit 5 in the second quarter of 2017 with no comparable amount in the second quarter of 2018.

Investment and interest income decreased earnings by $0.03 per share, primarily due to a decrease in the realized and unrealized net gains on securities held in the company’s Palo Verde decommissioning trust fund. Earnings also declined during the quarter by $0.03 per share due to an increase in depreciation and amortization expense, resulting from an increase in plant balances. On the positive side, earnings increased by $0.16 per share, due primarily to a decrease in the federal income tax rate as a result of the tax reform that was passed in 2017. As we will discuss in more detail in a moment, earnings also increased by 2.2% or $0.04 per share as a result of higher retail nonfuel base revenues. The increase in revenues was driven by favorable weather and solid customer growth, which contributed $5.9 million and nonfuel base rate increase of $4.1 million associated with our 2017 Texas rate case. These increases were offset partially by a refund of approximately $7.7 million to our customers related to the reduction in the federal income tax rate.

Now turning to Slide 12. I will quickly go over the impacts of the financial accounting standard and the use of a non-GAAP financial measure. As we have previously discussed, effective January 1, we adopted a new accounting standard related to financial instruments. As required by the new accounting standard, changes in the fair value of equity securities held in the nuclear decommissioning trust portfolio are now recognized in our statement of operations. The adoption of this particular standard may add significant volatility to the reported results of operations as changes in the fair value of equity securities may occur, therefore, we have provided a reconciliation of GAAP net income to non-GAAP adjusted net income, which excludes the impact of changes in the fair value of equity securities and realized and gains and losses from the sale of both equity and fixed income securities. In the second quarter of 2018, the net realized and unrealized gains after tax increased net income by $2.5 million, which was lower than the $4.1 million benefit recognized in the second quarter of 2017.

On Slide 13, we have provided an analysis of the changes in megawatt hour sales by customer class for the second quarter of 2018 compared to the second quarter of 2017. I would like to begin by highlighting the substantial increase in the megawatt hour sales to the residential customer class, which increased by 8.1%. This increase was primarily due to the favorable weather and the growth in the average number of customers served. The average number of customers served during the quarter increased by 1.5%. This growth trend is consistent with the trend we have seen in recent quarters.

Cooling degree days increased by 19% compared to 2017. The favorable weather conditions certainly helped in setting the second quarter retail sales record for the company. On Slide 14, we have provided a chart that displays second quarter sales for the past 20 years. This chart displays an impressive long-term growth rate and illustrates growth of 50% over the past 20 years. Clearly, hot summer weather was a significant factor in the 2018 increase. I will discuss this in more detail on Slide 15.

This chart illustrates that the second quarter of 2018 was the hottest in over 10 years, but with the what the chart doesn’t show is that the second quarter of 2018 was also the hottest quarter in over 75 years, in terms of the number of cooling degree days. Cooling degree days were approximately 20% above the 10-year average and 19% higher than the comparable period in prior year. These numbers showed that the role -- show the role that weather played in helping us set a company record for sales during the quarter.

Now turning to Slide 16. I will briefly discuss our capital requirements and liquidity. On June 30, we have liquidity of approximately $281 million, including cash balances and the borrowing capability available to us on our credit facility.

Our cash capital expenditures were approximately $117 million during the 6 months ended June 30, 2018. In total, we expect to spend approximately $236 million for cash capital expenditures this year. On July 19, our Board declared a quarterly cash dividend of $0.36 per share payable on September 28 to shareholders of record as of the close of business on September 14.

Now turning to Slide 17. I walk you through our 2018 earnings guidance. We are adjusting our GAAP 2018 earnings guidance range from $2.30 to $2.65 per share to $2.25 to $2.55 per share. The guidance range takes into consideration the results of operations for the first half of the year and considers significant variables that may impact earnings such as weather, generation-related expenses, capital expenditures and the impact of the recently enacted tax reform legislation. We have also provided 2018 non-GAAP guidance with a range of $2.05 to $2.30 per share. The non-GAAP range includes $8 million or $0.20 per share to $10 million or $0.25 per share after tax of unrealized and realized gains and losses from the Palo Verde decommissioning trust fund.

As I discussed earlier, the inclusion of unrealized gains and losses on equity securities in the decommissioning trust fund adds volatility to our earnings. As far as the quarterly guidance, we anticipate our effective tax rate, including state taxes will be between 23% to 24% for the year as a whole. On an annual basis, the net effect of the recently enacted tax reform should have a minimal impact on net earnings. However, outlined in the appendix, tax reform has an impact on our quarterly results. We are recording the benefits of the reduction in the federal income tax rate based on pretax earnings, and we are flowing back the savings to our customers based on kilowatt hour sales. And these items have a different timing pattern in the year. Again, we anticipate that the tax benefit and the reduction, the revenue reduction, will largely offset each other on an annual basis. Please refer to the appendix of the presentation for additional information.

That completes our prepared remarks, and at this time, I’d like to open the call for questions. Chantelle, could you help us with that?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Elizabeth Guynn, Mizuho.

Elizabeth Guynn

I have a few questions. Can you guys talk about your O&M expectations for the remainder of the year?

Nathan Hirschi

Yes. So we did have a high level of O&M this quarter for the generation outages that we said, and we’re optimistic that, that level will not be recurring in the second half of the year. Yes, obviously the reason why these things are somewhat unexpected, but we do think that they will level out to a level that’s more by historic standards through the remainder of the years.

Elizabeth Guynn

Okay, so you’re not anticipating any more outages sort of in the second half of the year, similar to what you experienced in the first and the second?

Nathan Hirschi

We’re currently not anticipating that. Obviously, they occur, the forced outages occur sometimes that are unplanned, but that’s currently not anticipated. But there’s obviously, Lizzie, an upward trend in O&M that you see over time, but we’re not seeing the same levels of generation O&M that we saw in the second quarter. At least that’s what we’re hoping.

Elizabeth Guynn

Great, and then it looks like some of your other partners are moving towards fixed income for the nuclear decommissioning trust. Is that something that you guys are considering? Or would that -- or, yes, is it something you guys are considering?

Nathan Hirschi

Yes. Obviously, the investment is being held for the very long term. So we’re really not, we’re trying to focus on how to manage the portfolio to meet those requirements when they first come due in the 2045 time frame. So we have a long-term horizon that we’re looking at, which would bode for some, always have a good degree of exposure to equities, but we are looking at that and especially as interest rates rise, we might consider a higher exposure to fixed income.

Elizabeth Guynn

Okay, great. And then my last question is, if the company were to hire an outside adviser, in the event of an M&A transaction, would that require a public disclosure?

Mary Kipp

So Lizzie, our policy has always been that we’re not going to comment on, I think this is probably arising from the market rumors that have been around for a variety of legal and regulatory reasons, we wouldn’t comment on that type of thing.

Elizabeth Guynn

Not necessarily towards a specific rumor necessarily, but just generally, in the process or procedure, is that something that requires a public disclosure?

Mary Kipp

We would not comment on that type of thing.

Operator

Our next question will come from Julien Dumoulin-Smith, Bank of America Merrill Lynch.

Julien Dumoulin-Smith

This is actually Claire, filling in for Julien here. So just actually wanted to follow up on the O&M question, except for a longer term view. So do you have any conclusions right now, in terms of how the program, the O&M program that you mentioned might affect your old long-term growth rate? Is there any quantification that you can give at present?

Mary Kipp

We don’t have any quantification at this time because it’s a very, very new program. We just started it in the last couple of months, but as I mentioned earlier, our goal is to take a longer term view to our outage schedule. So for example, in the one that we talked about previously, on Newman 2, we would have occurred additional significant expenses in ‘19 and ‘21, and by doing that work now, we’re actually going to have as savings. Now that said, as all of you know, we do have some older units and, as part of the RFP process, we’ll be analyzing how many of these units we need until -- and also until what point in time. So we’re hopeful that this is going to be helpful in our O&M. We think it’s a more deliberate approach, a longer term approach, which we believe is good for our customers and our shareholders. But we don’t have the quantification on this yet.

Julien Dumoulin-Smith

And that actually brings me to my next question, on your RFPs. I’m realizing that you have still an analysis process to go through. Previous comments made it sound like the RFP had brought in a lot of really competitive, really good fits. And so, do you have any view on how those days have compared to your base CapEx on the plan?

Mary Kipp

So we can’t speak to that, but the real reason for doing additional analysis and maybe I didn’t emphasize enough in my prepared remarks, but it’s a much more complex process electrically than it’s been in the past, because the proliferation of renewables and storage. But we’re not going to comment on where we are in that process at this point in time, and we’re not making any changes to our CapEx slide that you all have.

Julien Dumoulin-Smith

Okay, got it, same CapEx. And then my last question had to do with AMI. Realizing that you have this less creative strategy in Texas for 2019, it sounds like AMI has had a few more, it’s been a little bit more cautiously treated actually in New Mexico. I think your colleagues have some challenges getting it approved. How do you view the -- how do you view the prospects in New Mexico for your AMI planning?

Mary Kipp

It’s -- we’re in a slightly different situation than our neighbors to the north, in that 80% of our service territory is in Texas. So quite candidly, my strategy on this, or our strategy on this is to really focus on Texas, and hopefully, be able to deploy in New Mexico as well, but I certainly don’t see New Mexico not wanting to proceed with this act prohibiting our ability to deploy this in Texas. And as you know, Texas has been a great fan of AMI, and we think it provides a lot of customer benefits. In fact, in our sustainability report that we’ll be releasing later today, we have a lot of really positive things to report, but one of the negative things that is in it is that we are in one of the lowest performing quartiles on the number of smart meters deployed because we haven’t deployed them. So we think our community and our region really deserves to have this new technology and the benefits that it brings for our customers.

Operator

Thank you. Our next question will come from Andrew Levi, ExodusPoint.

Andrew Levi

I’m going to ask the question that you may not answer. But can you just address, obviously, there has been a bunch of rumors, the stock obviously reflects that. So anything, if anything you’d like to say about M&A, et cetera, et cetera, et cetera?

Mary Kipp

So Andy, our policy’s been the same as it’s always been, which is not to comment on any market rumors, and our Board will consider any such proposal. I believe it would be in the best interest of our shareholders and customers, but we also remain confident in our standalone plan.

Andrew Levi

And that’s what you said on the first quarter call.

Mary Kipp

Hey, I’m consistent.

Operator

Thank you. Our next question will come from Vedula Murti, Avon Capital.

Vedula Murti

In terms of the RFP being pushed back in terms of a conclusion, once you make -- once you decide the outcome if late in 2018, what’s the process then, that commences and at what point in time would any associate capital expenditures associated with the RFP likely start needing to flow through your capital program?

Nathan Hirschi

Well, the step after that would be getting regulatory approval, perhaps a CCN on that, and that would take maybe a year to work that way through the process. And then that would leave us with some conclusion that we’d be willing to go with. We’d probably incur some preliminary cost during that stage, but it would be toward the tail end of 2019 that we would start incurring the CapEx in order to get to the 2023, 2022 end service date that we’ve been previously discussing. Is that fair, Lisa?

Lisa Budtke

Yes, that’s exactly right. The bulk of the spend is right now projected into 2020 for the 320 megawatts that we have currently penciled in.

Vedula Murti

Can you remind me right now how much would the capital program for 2020 currently have penciled in? And can you give me a sense as to whether based -- whether the RP options will -- would increase that capital program? Or is the RFP just to validate it? Or there are things that are better, that would actually bring that capital number down?

Nathan Hirschi

Well, the CapEx that we went out with in the 10-K earlier this year is using a placeholder of our combined cycle in there that is using it. So obviously, as we make the final conclusions, the timing and the exact amounts of that, will be tweaked. As Mary mentioned, we will probably revise the CapEx thing when we come at our final conclusion later in the year, and -- but the amount of the -- the amount in the...

Mary Kipp

The year 2020 is approximately $90 million right now.

Nathan Hirschi

Starting in $90 million in 2020. So it’s just penciled in now. But there would be -- obviously, we continue to make CapEx, we continually adjust our CapEx schedule as we go forward, and we’ll come out. As I remember, last year, if you remember, we had a relatively large uptick in spending on transmission and distribution assets because the -- our peak load has been growing in recent years, and so we’re making those adjustments. Those will be coming in at the same time as we -- any tweaks on the T&D side will come in at the same time that we’re updating the RFP results.

Mary Kipp

And I know you didn’t ask this, but our IRP process, which is ongoing in New Mexico, we just released on July 19 the draft presentation and we’ll file that with the New Mexico Commission on September 17, but that’s public. And then the IRP, what was identified as resource additions to be the optimal cost-effective resource portfolio based on current information, which we wouldn’t exclude new information from the RFP, so the mix of solar, renewables, battery storage and then also a conventional 320-megawatt combined cycle. That’s subject to change, though, based on the market data that’s shown and as a result of the bids in the RFP.

Vedula Murti

Then is it reasonable to think that, with the placeholder in there as being to your own built combined cycle that, that’s probably the upper end of the capital outcome of the RFP and that other -- the mix would skew lower if other things were better?

Mary Kipp

We need to look at it, the whole process. And while it’s tempting, I don’t really don’t want to comment piecemeal on it.

Vedula Murti

Okay. And also, in terms of the marked marking of the trust and everything like that, in the third quarter of 2017, what was the benefit or the negative impact from that?

Nathan Hirschi

I don’t have that right in front of me.

Mary Kipp

At least I might have it here. In the third quarter of 2017, the NDT gains were approximately $2 million.

Nathan Hirschi

So, Vedula, we did have a relatively high level of NDT gains in the second quarter of ‘17, and that was the highest level that we had last year, which gave us -- that was one of the reasons why this quarter had some tough comparables, because we had the $5 million of the Palo Verde performance rewards, we had pretty good weather, and then we had those NDT gains, which are relatively high in the second quarter of last year, that they drop off to a more moderate level in the third quarter last year.

Vedula Murti

Okay and there’s no other items, such as the Palo Verde performance incentive or any other types of items that will be coming up between or that will affect the comps between now and the end of year?

Nathan Hirschi

Well, we did -- last year, we did have the relay back period -- the relate back for 2017 rate case was recorded in the fourth quarter of last year. And so this -- we won’t have that in the fourth quarter, but we will obviously have the impacts of that rate increase will be recognized in the third quarter of this year whereas, last year, it was deferred, delayed and recognized in the fourth quarter. So that’s one of the items that make the remaining part of the year a little bit different than last year.

Vedula Murti

So the third quarter benefits, while the fourth quarter comparison basically is cumulative as opposed to a quarter, so the 4Q comparison will be somewhat -- will be more difficult?

Nathan Hirschi

Exactly. And again, our revenues are a little bit higher in the third quarter, so that -- and that was -- those incremental revenues were pushed in the fourth quarter last year from that rate increase. So that was the major item.

Operator

Our next question will come from Chris Ellinghaus, Williams Capital.

Chris Ellinghaus

Can we infer from the guidance change that, that, that really just reflects the unexpected O&M in the second quarter?

Mary Kipp

Yes. Well, the unexpected and then the additional work that we pulled forward.

Nathan Hirschi

And then of course, we did the -- the guide rates didn’t drop by all that much because we did have the real solid weather, real solid revenue growth, and the second quarter -- partially offset that.

Chris Ellinghaus

Right, are you taking any cost control efforts to try to mitigate that unexpected amount from the second quarter?

Mary Kipp

Yes, that’s what I was attempting, perhaps in our ploy to talk about in my prepared remarks. We really are trying to find ways, and it may not be this year. I don’t know if that’s your question, but certainly over the medium term, we hope that the efforts we’re making now are going to be -- result in more reasonable levels of O&M on some of these older units, particularly with regard to forced outages, we’d really like to avoid those as much as possible.

Nathan Hirschi

But one thing on that, Chris, maybe to point out just a little bit is, if you look at our, the year-over-year difference of about $0.09 for the quarter, if you look over on the 6-month basis, the generation outage expenses was $0.02 for the 6 months. So some of it was the timing within the year. So the upward -- the trend for the 6 months was not as dramatic as the trend for the 3 months.

Chris Ellinghaus

And you guys have done a really good job of keeping O&M inflation very low for a number of years now. Is this new generation effort really an effort to be able to maintain that very low inflation rate on the O&M side?

Mary Kipp

Yes, that’s what we would like to do, and like I said, the reason that we’re focusing on it now is the last several years, we’ve really had to focus on building new generation, getting it in rate base, and then we’ll be having new generation come on as well in a couple of years. And so we thought that this was really a good time to make sure that all of our local generation, much of it aging, is in good shape.

Chris Ellinghaus

Okay. And one last thing. About the RFP change. You talked about the sort of market and technological changes having affected your thinking a little bit. Does it -- is it -- did -- have you made additional submissions and does that mean maybe you’re thinking more on the combustion turbine side than on the combined cycle that?

Mary Kipp

We’ll just have to see what it yields, but I unfortunately can’t comment on that.

Chris Ellinghaus

Okay. Can you say if you have either encouraged or received build on transfer options?

Mary Kipp

I can’t comment on any of that. Sorry. If I do, my General Counsel will have my head, and he’s sitting right here.

Operator

[Operator Instructions] Our next question will come from [indiscernible].

Unidentified Analyst

I’m just trying to understand the outages a bit better, and to what extent have they, in any way, related to warmer or hotter weather in particularly summers, and to what extent is this preventable through maintenance and CapEx? So is this just increasingly part of the future?

Mary Kipp

So it’s not attributable to hot weather, and the outage that we talked about, the most significant one related to Newman, we had a bode rotor that’s been there for several years, and it had reached the point that it had caused some seals to have issues. So we could have gone and it and just fixed the seals and hope that the rotor would run a little bit longer until we get to our planned outage in ‘19, but we think it’s much more prudent, in terms of both, the cost of opening up the unit again in ‘19 is significant, so we just thought we do the work now. So really, it is trying to do more work when we have a unit open and taking the additional time to do the work right, not saying we didn’t do it right in the past, but sometimes we didn’t take advantage of the opportunity to do all the work we can.

So I’m hoping that by doing a little bit more work up front, we eliminate the need to do things down the road. It’s also good for our customers. It enhances reliability. We stood at the southeast corner of [indiscernible], we want to make sure that our units are in good shape, and we think we owe it to our community and our regulators, too. But to answer your question specifically, no, we don’t think this is the new normal, and it is not related to hotter weather.

Operator

[Operator Instructions] Speakers, at this time, we have no further questions in the queue.

Lisa Budtke

Okay, thank you again, Chantelle, and thank you, everyone, for joining us on today’s call. Please be safe.

Mary Kipp

Thanks, everybody.

Operator

Thank you very much. Ladies and gentlemen, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.