Excelerate Energy Inc

NYSE:EE

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the El Paso Electric Company First 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]

Thank you, Amy. Good morning, everyone. Thank you for joining the El Paso Electric Company First Quarter 2018 Earnings Call. My name is Lisa Budtke, and I am the Director, Treasury Services and Investor Relations. On the call today are, 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. If you do not, you can obtain them from our website.

We currently anticipate that our first quarter Form 10-Q will be filed with the Securities and Exchange Commission on or before May 4. We would also like to inform you that we will be attending Citi’s Global Energy & Utilities Conference on May 15 and 16 in Boston. We will also be holding our Annual Shareholders Meeting at our corporate headquarters in El Paso, Texas on Thursday, May 24.

Lastly, we will be participating in the Bank of America Merrill Lynch West Coast Utilities Conference on May 30 and June 1 in Los Angeles and San Francisco.

Please refer to our upgraded Investor Relations section of our website for any upcoming events.

A replay of today’s call will be available shortly after our call ends and will run through May 17. 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 on 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 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 and other factors discussed in the company’s SEC filings are not exhaustive, and we do not undertake to update any forward-looking statement. Any such statements 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 the Generally Acceptable Accounting Principles, or GAAP, the company has provided adjusted net loss, which is the non-GAAP financial measure.

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 sentimental changes in the earnings capacity of the company. Slide 3 contains a description of our use of this non-GAAP measure and Slide 9 provides the reconciliation of this non-GAAP measure to the most comparable GAAP measure.

So now I’ll turn the call over to Mary.

[Mary Kipp, Chief Executive Officer]

Thanks, Lisa, and good morning, everyone. Turning to Slide 4. On our last earnings call, we mentioned that some new accounting standards will impact the volatility of our earnings and the presentation of our financial results beginning in 2018. One of these accounting standards require that the changes in the fair value of equity securities within our nuclear decommissioning trust portfolio be recognized in our statements of operations, which may add significant volatility to our operating results.

Accordingly, we have decided to start presenting earnings on a GAAP and on a non-GAAP basis. As expected, for the first quarter of 2018, we’re reporting a GAAP net loss of $7 million or $0.17 per share. This compares to a net loss of $4 million or $0.10 per share for the first quarter of 2017. So the accounting standard negatively affected our operating results in the first quarter.

After removing the net unrealized losses on equity securities and net realized gains from 2018 and 2017, on a non-GAAP basis, we are presenting an adjusted net loss of $0.12 per share for the first quarter of 2018 compared to an adjusted net loss of $0.14 per share for 2017.

The net loss for the quarter was expected and represents seasonality of our business. This is, in fact, the third year in a row that we’ve recognized the net loss in the first quarter. Nonetheless, we continue to see positive economic growth in our region and to experience solid growth in the number of customers served.

Continuing on Slide 5, following the enactment of the Tax Cuts and Jobs Act of 2017, and in compliance with our 2017 Texas rate case settlement, on January 1, we started recognizing the reduction in revenues due to the change in the federal corporate income tax rate. On March 1, we filed a proposed refund tariff with the Public Utility Commission of Texas, the city of El Paso and other municipalities to reduce base rates for Texas customers equivalent to the expected annual decrease of $22.7 million in federal and income tax expense. In late March, the commission approved our proposed refund tariff on an interim basis for customer billings, effective April 1, 2018.

In mid-April, staff commission filed their recommendation supporting approval of the refund tariff. We are waiting a final order, which we anticipate receiving in the second quarter. The refund tariffs will be reflected in rates over a period of a year and will be updated annually until new base rates are implemented in our next rate case filing.

Moving on to Slide 6. In New Mexico, on January 24, the commission initiated a proceeding on the impact of the federal corporate income tax rate reduction on New Mexico utilities. In late February, we filed a response to that inquiry. Based on our response, the commission issued an order in early April, which required us to file a proposed interim rate writer to adjust our New Mexico base revenues in an amount equivalent to the reduced income tax expense to be implemented on or before May 1.

On April 16, after consultation with the New Mexico Attorney General as required by the order, we filed an interim rate writer with an annual refund of approximately $4.9 million.

On April 25, the commission approved our interim rate writer to be implemented in customer bills, beginning on May 1.

Also, on March 15, the Federal Energy Regulatory Commission issued orders directing 48 public utilities, including El Paso Electric, to propose revisions to their transmission rates for the reduction in the federal income tax rate or show cause why they should not be required to do so. We’re currently in the process of analyzing this request, and will respond on or before the required date of May 14, 2018.

Turning now to Slide 7. I will discuss some of our recent highlights. On March 20, we filed a request with the Public Utility Commission of Texas to expand our Texas Community Solar Program to include additional solar energy to serve more customers and to reduce the monthly capacity charge for all program participants. If approved, the additional 2 megawatts of solar energy would allow for the immediate participation of our customers on the waiting list, bringing the total number of community solar customers to approximately 2,500.

Additionally, the expansion would reduce the monthly capacity charge by 9.4% per kilowatt for all program participants, including those currently enrolled in the voluntary program. Also, during the quarter, we filed for a 2-megawatt community solar program with the New Mexico Commission. We look forward to expanding our Community Solar Program into New Mexico, and we anticipate it will be just as popular as it’s been in Texas. We also continue to make progress on the construction of the Holloman Air Force Base Solar Facility. We anticipate that the 5-megawatt facility will be commercially operational by the third quarter of this year.

The addition of affordable large-scale solar projects to our mix of generation has been an important objective for us. As we continue to evolve and expend with our communities, we strive to do so in a safe, cost-effective and reliable manner. In Texas, on April 16, we filed for reduction in our fuel factor of approximately 29%, effective May 1. We expect the residential customer using 785 kilowatt hours per month in the summer, will see an average bill decrease in a month of $4.89 or 4.76% of their total electric bill.

I would also like to highlight that on April 12, we received a 2018 ENERGY STAR® Partner of the Year Award for our efforts in kilowatt hour savings and increased education regarding energy efficiency. This recognition demonstrates the importance our community places on energy efficiency. We want to continue supporting measures that help our customers save energy, enable cost reduction and assist us in our efforts to continue to improve our carbon footprint.

Finally, I would like to mention that we recently added two new members to our management team. Elaina Ball was recently added as Senior Vice President and Chief Administrative Officer. She joins us from Austin Energy, where she recently held the position of Chief Operating Officer. We’d like to welcome Elaina and her family to El Paso. We also added Victor Rueda as our Vice President of Human Resources and Community Outreach. Victor joins us from Western Refining, where he was responsible for overseeing human resources for the past 14 years and most recently served as Vice President of Human Resources for the past nine years. I look forward to working with them as we continue to provide a superior level of service to our customers. If you’ll now turn to Slide 8, Nathan will cover our first quarter key earnings per share drivers.

[Nathan Hirschi, Chief Financial Officer]

Thank you, Mary. We experienced a decline in earnings per share during the first quarter of 2018 of $0.08 per share, largely due to a decrease in investment in interest income.

The reason for the decline in investment and interest income was due primarily to $3.8 million of net unrealized investment losses from our Palo Verde generating station decommissioning trust, being recognized in the statement of operations as required by one of the new accounting standards that Mary previously mentioned. Earnings declined by – in the quarter by $0.04 per share due to an increase in depreciation and amortization, primarily due to increased plant balances. Earnings also declined by $0.02 per share due to increased administration and general expense, primarily due to increases in pension and benefit expenses.

On a positive side, earnings increased by $0.06 per share due to decreased operations and maintenance expense related to our fossil fuel generating plants, primarily due to planned outages at the Newman Power Station in 2017, partially offset by planned outages at Rio Grande Power Station Unit 8 in 2018. Another positive driver during the quarter was retail non-fuel based revenues, which increased by $0.01 per share, primarily driven by a $2.8 million base rate increase approved in the 2017 Texas rate case.

Revenues from residential customers also increased by $1.6 million, primarily due to favorable weather compared to last year and a 1.7% increase in the average number of residential customers.

These increases were partially offset by approximately $4.1 million related to the reduction in the federal corporate income tax rate for the first quarter of 2018 for our Texas customers, which Mary previously mentioned. Our Texas customers began receiving this refund in April of 2018.

Now turning to Slide 9. I would like to go over the impacts of the new financial accounting standard and the use of a non-GAAP financial measure. Effective January 1, we adopted a new accounting standard related to financial instruments. Upon adoption of the new standard, we recorded a cumulative effect adjustment to retained earnings of $41 million, net of tax, for the net unrealized gains related to equity securities. As required by the new standard, changes in the fair value of equity securities are now recognized in our statement of operations. As we have previously discussed, the adoption of the new standard may add significant volatility to the reported results of operations as changes in the fair value of equity securities may occur.

Additionally, the equity investments included in our nuclear decommissioning trust funds are significant in our expected increase during the remainder – remaining life of Palo Verde. As of March 31, 2018, we had approximately $284 million invested in the nuclear decommissioning trust, with approximately 52% invested in equity and equity-related securities. These have provided – therefore, we have provided a non-GAAP financial measure, which reflects the GAAP net loss adjusted to exclude the impacts of the change in the fair value of equity securities and realized gains and losses from both the sale of equity and fixed income securities.

Going forward, we plan to continue to provide GAAP earnings and non-GAAP adjusted earnings. As far as the other accounting standards, we have – which have changed the presentation of certain line items of our – within our statement of operations, we have included a couple of slides in the appendix to go over those – that information in more detail.

Turning to Slide 10. We have provided a comparative analysis of the historical weather experienced during the quarter. As you can see, we experienced mild winter weather during the first quarter of 2018. Heating degree days were approximately 13% below the 10-year average, while being 19% higher than the same period last year. It is important to note that the first quarter of 2017 set a record low for the number of heating degree days in over 72 years. Although the current quarter was ahead of prior year’s first quarter, all three months of this – of the current quarter were below the 10-year average.

Now on Slide 11, we have provided an analysis of the changes in megawatt hour sales by customer class for the first quarter of 2018 compared to the same period in 2017. We continue to experience solid sales growth through our residential customers. During the quarter, sales to residential customers increased by 2.6%. As you can see, we also continue to experience growth in the average number of customers served. The average number of total retail customers served in the quarter increased by 1.5%, which is in line with recent trends.

On Slide 12, I will briefly discuss our capital requirements and liquidity. On March 31, 2018, we had liquidity of approximately $120 million, including the cash balance – including our cash balance and the borrowing capability available to us on a revolving credit facility. Our cash capital expenditures were approximately $67 million during the first quarter of 2018. In total, we expect to stand approximately $236 million for cash capital expenditures in 2018.

In terms of cash dividend, our board declared a quarterly cash dividend of $0.335 per share on February 1, 2018, which was paid on March 30, 2018. During the first quarter of 2018, we paid $13.6 million in quarterly cash dividends. The board will evaluate the dividend policy during the second quarter of this year.

As we continue to make progress on our current construction program, we are considering returning to the debt markets in the first half of 2018 to issue long-term debt.

If you now turn to Slide 13, I would like to walk you through our 2018 earnings guidance. We are reaffirming our 2018 earnings guidance range of $2.30 to $2.65 per share. The guidance range assumes normal operations and considers significant variables that may impact earnings such as weather, expenses, capital expenditures, nuclear decommissioning trust gains and losses and the impact of the recently enacted tax reform legislation. The midpoint of the guidance range assumes 10-year average weather. The guidance range includes $8 million or $0.20 per share to $10 million or $0.25 per share, after-tax, of unrealized gains on equity securities and realized gains and losses from the sale of both equity and fixed income securities from the Palo Verde decommissioning trust fund.

Prior to wrapping up our prepared remarks, I would like to remind you a few items that should be taken into consideration during 2018. For instance, in the second quarter of 2017, we recognized $5 million of Palo Verde performance rewards, which contributed $0.08 per share. These rewards are normally recognized every three years, so we do not have a corresponding benefit in 2018. Further, in the fourth quarter of 2017, we recorded $4.8 million or $0.08 per share of relate-back revenue, which related to the third quarter of 2017 for the period from July 18, 2017 through September 30, 2017. So in the third quarter of 2018, we should see a quarter-over-quarter increase for this amount and an equivalent decrease in the fourth quarter of 2018.

That completes our prepared remarks. At this time, I’d like to open it up for questions.

Amy, can you help us out on that?

[Operator]

Absolutely, and thank you, sir. [Operator Instructions] And we’ll take our first question from Julien Dumoulin-Smith from Bank of America Merrill Lynch.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Hey, good morning.

[Mary Kipp, Chief Executive Officer]

Hey, good morning, Julien.

[Nathan Hirschi, Chief Financial Officer]

Good morning, Julien.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

If I can, I suppose it’s like an obvious question to ask you. So I just want to kind of lob it out that we get it out of the way. Can you talk about your willingness to look at the company from a strategic perspective, perhaps just more broadly? And then what the company’s history is with regards to that over the years?

[Mary Kipp, Chief Executive Officer]

Julien, we don’t comment on that type of thing. But as we’ve always said, our board will consider any proposal that it believes is in the best interest of shareholders and customers. But we also remain confident in our stand-alone plan.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Got it. And just to be clear, if there was to be something that would come about, what approvals would be required just to make sure we’re on the same page?

[Mary Kipp, Chief Executive Officer]

I guess, we would need approval from the New Mexico Commission, the Texas Commission, the FERC and for the transfer of the franchise to the city of El Paso.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Excellent. All right. I think that probably hits in on that front. Just coming back to the credit real quickly on Moody’s. How do you think about supporting the credit? And then also what kind of FFO to debt are you looking at prospectively versus where they want you to be?

[Nathan Hirschi, Chief Financial Officer]

Well, we had really – we had pretty strong metrics in 2017. It was a pretty good year for us with free cash flow. I think our FFO to debt from an S&P perspective was 17%. And so it was pretty good. Looking forward though, this RFP that we have going out really significantly affects – our future capital construction is really tied to how the CapEx is going to be tied looking at this RFP that we have coming out in the $1.3 billion of CapEx that we have over the next five years. So that does put some strains on our capital structure, even without the changes in tax reform. So we are looking at what we need to do. We don’t see that we’d need an equity issuance any time in the next year or so, but looking at longer term depending on how the outcome of the – looking on the outcome of the RFP turns out, that is the possibility to have to add some equity to our capital structure.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Excellent. Two last quick questions. The NDT, in fact, that was a onetime for the quarter here?

[Nathan Hirschi, Chief Financial Officer]

No. That’s – it really wasn’t that big of an effect on the quarter, but what we really try to get out in front of that is to sensitize the investment community. That’s not the recurring effect. The $41 million impact to retained earnings, that’s a onetime cumulative effect adjustment. But going forward, there will be volatility related to the equity portfolio on our nuclear decommissioning trust. And that’s really what we wanted to try to sensitize the community to is that that’s a recurring-type of issue. And over the long term, it was positive.

Like we said, we took $41 million of unrealized gains directly to retained earnings at the beginning of the year. So over time, that’s a real benefit for us, and we think we have properly invested. But over any given quarter, that could be plus or minus. And that’s what we really wanted to try to highlight in the quarter.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

And then just quickly on trade in NAFTA. Any updates just in terms of the dynamics there? And how that might be impacting you sort of actively?

[Mary Kipp, Chief Executive Officer]

Yes. So I would have actually anticipated NAFTA would have been a more significant issue for us to date. But currently, we’re very optimistic about the potential outcome. And we haven’t seen much impact on the local community at all. In fact, we continue to see growth and we continue to see new businesses relocating here and additional businesses expanding. So all is positive so far.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Excellent. I’ll leave it there. Thank you very much.

[Mary Kipp, Chief Executive Officer]

Thank you.

[Nathan Hirschi, Chief Financial Officer]

Thank you, Julien.

[Operator]

[Operator Instructions] And next from Williams Capital, we’ll hear from Chris Ellinghaus. Please go ahead.

[Chris Ellinghaus, Williams Capital]

Hey, good morning, everybody. How are you?

[Mary Kipp, Chief Executive Officer]

Hey, good morning, Chris.

[Chris Ellinghaus, Williams Capital]

I – explain this to me Nathan, I’m a little bit confused. I get breaking out the unrealized for the first quarter, makes perfect sense to me, it’s unrealized. But the guidance you talk about including unrealized gains and realized gains. So should we be thinking about breaking them out as a whole for the year? And can you give us any sort of breakdown of that $8 million to $10 million of what’s realized versus unrealized?

[Nathan Hirschi, Chief Financial Officer]

Well, no, we really never try to distinguish the realized versus the unrealized. We always saw that. What we were trying to do is back out any market related fluctuation gains or losses, right? So those were – and the difference between a realized gain and unrealized gain is just where we would have turnover within the portfolio. So we really looked at it as being a single item of both realized and unrealized gains without trying to make a distinction.

But both of those amounts that we included, the $8 million and the $10 million or the $0.20 or the $0.25 per share, those are included in the – our guidance range. So it will just give an opportunity to realize, for example, we’re at a $2 million loss for the portfolio in the first quarter of the year, that will allow us to be able to track how we’re doing versus – breaking that out it provides more information to how – to show how we’re tracking on that individual component as the year goes by.

[Chris Ellinghaus, Williams Capital]

Okay. Have you got a number for what – how weather impacted the quarter versus normal?

[Nathan Hirschi, Chief Financial Officer]

Yes, like we said, it was a better quarter than last year on a weather perspective, but it was still below the – our average. So we think it was about $1 million negative for the quarter, about $0.02 a share. Weather hurt us for the quarter versus normal.

[Chris Ellinghaus, Williams Capital]

Okay. Looking at customers, you’ve had a sort of a nice trend of acceleration in customer growth. But the first quarter was a little bit lower than the last, maybe four, five, six quarters. Is there a reason for that? Or is it just too early to tell what the year will look like?

[Nathan Hirschi, Chief Financial Officer]

Yes. I think there’s always some movement that moves around when you have some housing developments and some public housing projects coming or going out of some of the numbers. So it’s – it can come in somewhat lumpy. So it’s too early. Like as you mentioned, Chris, we’ve seen some solid 1.6%, 1.7% gains. This quarter is a little bit less than 1.5%. Still pretty solid. But yes, we can’t really focus on if there’s really been a trend or that’s just some noise in the kind of system there.

[Chris Ellinghaus, Williams Capital]

Okay, great. Thanks for the comment. Appreciate it.

[Nathan Hirschi, Chief Financial Officer]

Thanks, Chris.

[Operator]

[Operator Instructions] Next, we’ll hear from Lizzie Guynn with Mizuho. Please go ahead.

[Lizzie Guynn, Mizuho]

Good morning, everyone. So I think I just need a little bit more clarification on the 2018 earnings guidance. So is this considered GAAP guidance? Or now that you are giving us an operating number and a GAAP number, how should we think about that in the context of guidance?

[Nathan Hirschi, Chief Financial Officer]

Well, we’ve really tried to just keep very consistent with providing GAAP guidance. Although within this information, we – and the information that we’ve added in the schedule to the press release, it can be easily converted to non-GAAP, guys. But our plan is to continue to give non-GAAP guidance and then provide the range modifiers that relate to the unrealized and realized equity gains.

[Lizzie Guynn, Mizuho]

Okay. And then how do you expect regulatory lag to change in 2019 with the TCRF and DCRF implementation?

[Nathan Hirschi, Chief Financial Officer]

Yes. Well, yes, you’re right. We have not utilized the TCRF or DCRF historically, but we do plan to go in, in early 2019 to include a DCRF and quite possibly the TCRF. And so that would help reduce us the regulatory lag we anticipate going in, in the first quarter of the year, and that should help us. So it will take six months to – we think it’ll take approximately six months to get those new writers in place and those new items in place. So we won’t eliminate regulatory lag, but it will help us on the T&D. And as you saw with the CapEx that we’re spending, we do have a fair number of CapEx coming in the next coming years with – from transmission and distribution capital expenditures. So this will help us going forward. Won’t eliminate regulatory lag, but it will help us.

[Mary Kipp, Chief Executive Officer]

Yes. And the six months is an estimate. Because obviously, the first time out of the box, using one of these, there is always a little uncertainty, could be a little bit shorter, could be a little bit longer. But certainly, very positive directionally from a regulatory lag standpoint.

[Lizzie Guynn, Mizuho]

Okay. Great. And then my last question is on the 320-megawatt RFP project. What do you expect the CapEx distribution to be in the 2018 to 2022 timeframe?

[Nathan Hirschi, Chief Financial Officer]

Do you have that, Lisa? The amount in the 2018 is relatively nominal. Do you have those numbers, Lisa?

[Lisa Budtke]

No. Yes, I need to look for that real quick with me.

[Mary Kipp, Chief Executive Officer]

And whilst she is getting these numbers, I would just emphasize that what they’re about to tell you is clearly estimates because we do not have the project selected yet.

[Nathan Hirschi, Chief Financial Officer]

And that we’re looking for the third quarter for to get some clarity on that.

[Lisa Budtke]

So, Lizzie, all I have is the total amount. So what’s included in the capital expenditure plan is 305 megawatts for combined – for the combined cycle from the period from 2018 through 2022, but I can give you the breakout of that. So I can send you an e-mail or we can talk later.

[Lizzie Guynn, Mizuho]

Perfect. Okay, thank you so much.

[Operator]

[Operator Instructions] It appears there are no further questions at this time. Ms. Budtke, I’d like to turn the conference back to you for any additional or closing remarks.

[Lisa Budtke]

Thanks again, Amy, and thank you, everyone for joining today’s call. And we hope to see you during one of our upcoming events. Please be safe.

[Operator]

This concludes today’s conference. Thank you for your participation. You may now disconnect.