Excelerate Energy Inc

NYSE:EE

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome to the El Paso Electric Company's Fourth 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.

[Lisa Budtke]

Thank you, Andrea, and good morning, everyone. Thank you for joining the El Paso Electric Company's Fourth Quarter 2018 Earnings Conference Call. My name is Lisa Budtke, and I'm the Director of Treasury Services and Investor Relations.

On the call today 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 don't, you can obtain them from our website on the Investor Relations page.

We currently anticipate that our fourth quarter 2018 Form 10-K will be filed with the Securities and Exchange Commission on or before Thursday, February 28. We would also like to inform you that we will be attending the Bank of America Merrill Lynch 2019 Power Utilities and Renewable Conference on March 5 in Boston, Massachusetts.

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 March 13. 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 risks and other factors that 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 statements. 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 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 the fundamental changes in the earnings capacity of the company.

Slide 3 contains a description of our use of these non-GAAP measures and Slide 20 provides a reconciliation of these non-GAAP measures to the most comparable GAAP measures.

Now, I'll turn the call over to Mary.

[Mary Kipp, President and Chief Executive Officer]

Good morning, everyone. In 2018 we were able to make significant advances on several items that will help us expand and improve our service options and prepare for the next round of generation additions.

On Slide 4 of the presentation, I'll highlight some of our 2018 operational accomplishments. At year-end, we announced the results of our 2017 All Source Request for Proposals. After extensive evaluation of the numerous proposals, we identified a diversified mix of resource additions, comprised of utility scale solar, battery storage, and natural gas resources.

In 2018 we were also able to engage our local leaders to discuss the benefits of implementing Advanced Metering Infrastructure, or AMI, which is the backbone of a smart community. Our outreach in education efforts have helped us to improve understanding of these important initiatives that will help improve grid reliability and resiliency, while allowing for the expansion of the service options we can provide to our customers.

During the second quarter of 2018, we implemented a comprehensive program in power generation to better evaluate and improve the operation and maintenance of our generation fleet. While we recorded a higher O&M costs to our local generating plants during the second and third quarters, we are hopeful that this new program will help reduce costs and improve operational efficiencies for our generating units over the longer term.

In 2018 we set a new record for the number of megawatt hours sales recorded during the year. The record sales are a result of consistent customer growth, economic expansion on our communities and favorable weather. With regard to our desire to add renewable resources in a responsible and cost effective manner, we are pleased to report that the Holloman Air Force Base Solar Facility became commercially operational in October 2018.

The output from the 42-acre, 5-megawatt solar facility will be dedicated for use by the base and will help the Air Force meet its renewable and energy security goal. In addition, in March 2018, we filed for approval to expand the Texas Community Solar Program to include 2-megawatts of solar power generation from the 10-megawatts solar facility located at our Newman Power Station. A hearing was held in December and we anticipate receiving a final order in the first half of this year.

In April of 2018, we also filed for approval to initiate a Community Solar Program in New Mexico. The New Mexico Community Solar Facility was anticipated to add 2-megawatts of clean renewable generation to our portfolio. However, in January of 2019, the New Mexico Commission dismissed our community solar filing without prejudice. We will continue to evaluate our options to determine if a voluntary renewable option can be successfully approved and implemented in the future in New Mexico.

Despite the complexity and the number of proposals and initiatives our team faced this year, except for retaining – obtaining regulatory approval for New Mexico Community Solar Facility, we accomplished all of our goals.

On Slide 5, I will discuss some of our sustainability and financial accomplishments. In August 2018, we issued our first corporate sustainability report as we recognize the need to communicate and make public our efforts and achievements regarding environmental and corporate sustainability initiatives. The report demonstrates our commitment to transparency and continuous improvement regarding environmental, social, and governance performance.

During the year, we received the 2018 ENERGY STAR Partner of the Year Award for our efforts in kilowatt hour savings and increased education regarding energy efficiency. In September of 2018, we were awarded the first ever Community Partner Award from the El Paso Neighborhood Association Coalition. The award was given to the company in recognition of its continued partnership and community outreach efforts with the city's neighborhood associations.

Additionally, we achieved our highest customer service ratings in 2018. Each year since 2009, we survey our customers to measure their satisfaction with the level of service they receive. Last year, we received the highest rating since 2009. I would like to thank our customer care team for their dedicated efforts and commitment to providing superior service to our customers.

Turning to our financial accomplishments, in May 2018, our Board of Directors approved a 7.5% increase in the annual cash dividend. This illustrates our Board's continuous commitment to return value to shareholders. In June, the Company issued $125 million of 10-year senior unsecured note. At the same time, the Company guaranteed the issuance of $65 million of seven-year senior unsecured notes by the Rio Grande Resources Trust.

We utilize the trust to finance our portion of nuclear fuel for Palo Verde. The net proceeds from the sales of these senior notes provided additional liquidity as the proceeds were used to repay short-term borrowings under our revolving credit facility.

Additionally, in September, 2018 we entered into an amended and restated credit agreement. Under the terms of the agreement, the Company has available $350 million in a revolving credit facility with the term ending on September 13, 2023.

Also in 2018, we were successfully lowering our Texas customer bills through reductions to our Texas fixed fuel factor. In fact, we reduced our Texas fixed fuel factor by approximately 34% over the course of 2018.

In terms of earnings in 2018, we reported non-GAAP earnings per share of $2.33, which was approximately 5% higher than prior year and was at the upper end of our 2018 non-GAAP guidance range.

Building on our accomplishments in 2018, I will now turn to our 2019 objective on Slide 7. In terms of regulatory objectives, we anticipate obtaining approval for our Texas transmission and distribution costs recovery factors in the second half of 2019. We filed our transmission cost recovery factor on January 25 and plan to file for approval of the distribution cost recovery factor in late March.

Another important objective for 2019 is seeking a necessary regulatory approval for our new generating resources in the second half of this year. Also in 2019 we will be filing our next general rate case in New Mexico. As you may recall, we are required to file our next rate case no later than July 31, 2019.

We anticipate filing that case using historical tests year into December 31, 2018 and we're already working on putting together our rate filing package. Another vital regulatory objective is to file a general rate case with the Federal Energy Regulatory Commission.

Later this year, we plan on filing for recovery of an increased transmission revenue requirement. We're still working on the analysis to determine the size and timing of the request. Another goal for 2019 is to seek legislative clarification for AMI in Texas for the first half of 2019.

Legislation has been introduced in both the Senate and the House during the current Texas legislative session, which ends in May that would allow the three remaining non-ERCOT utilities including El Paso Electric to have the opportunity to seek regulatory approval of an AMI deployment plan and related costs recovery.

If the Texas legislation is approved, we will then be allowed to develop the business case and then seek regulatory approval in Texas and New Mexico. If successful, this would allow us to make investments to modernize our electric grid that will further improve our operational efficiency while expanding customer products and services such as smart pricing options, high usage alerts, and online energy management tool.

Turning to Slide 8, I will briefly cover our 2019 financial and sustainability objectives. In 2019 we anticipate raising capital in the equity markets to maintain a balanced capital structure. The timing and size of the equity issuance is still being analyzed and we're currently awaiting approval from the New Mexico Commission and FERC.

In the second quarter of 2019, we anticipate refinancing $100.6 million of the 2009 series A and B Pollution Control Bonds. We may remark at the bonds or replace them with senior notes in an equivalent amount. As part of our strategic plan, we continue to focus our efforts on optimizing our operations and maintenance expenses. We will continue to look for improvements to our current processes that may result in lowering our operations and maintenance expenses over the long-term.

Turning to our sustainability goal, in 2019 employee safety will continue to be an area of focus. This year we have set expectations to improve our safety culture, recommit ourselves to safety as a core value and reduce the risk of injuries. We are increasing training and awareness in particular for our high risk employees who face the most hazards in their jobs. We are committed to protecting our most important assets, our employees.

In 2019 we are also working on an initiative to establish our long-term goals to further improve our carbon footprint. We lowered our carbon footprint by more than 16% over the past three years, but we're constantly looking for additional ways to practice sustainability.

Another way we will serve our community is to partner with our customers on dedicated resource options including renewable resources. We're currently collaborating with New Mexico State University to investigate opportunities regarding renewable energy, batteries, climate action, and micro grid development initiatives.

Our 2019 objectives also include reaching new collective bargaining agreements with the International Brotherhood of Electrical Workers Local 960 which represents approximately 37% of our workforce. We look forward to working with our union to reach a new agreement that will allow us to continue to provide our customers with a superior level of service.

Lastly, we continue to build on our high level of customer service by improving our engagement efforts through new website and billing options. As you can see, 2019 will be a busy and challenging year, but we're already working hard towards the accomplishing these objectives.

Many of our goals are tied to the continuous growth we're experiencing in our service territory. Nothing highlights the growth in our communities better than the information on the chart we've provided on Slide 9. This chart demonstrates a pattern of consistent and continuous growth in our service territory since 1998. As you can see, our megawatt hour sales continue to trend upward on an annual basis.

In fact, we have set a new megawatt hour sales record in 2019 out of the last 20 years. Due to this sustained growth and the demands placed on our system, we've identified the need to plan for upgrades and expansion of our transmission and distribution infrastructure and for additional generation resources to be in place by the year 2023.

In terms of the additional resources on Slide 10 we have provided anticipated timeline for the approval and commercial operation dates for the resources selected in our RFP. On June 30, 2017, EPE issued an All Source RFP to select additional long-term cost effective and reliable electric resources to commence operation by the 2022, 2023 summer peak season.

In December, 2018 we announced the winning bids, which included the expected energy purchase of 200 megawatts of utility scale solar resources, 100 megawatts of battery storage and the construction of 226 megawatt natural gas combustion turbine at the company's Newman Power Station.

The selected proposals are subject to the execution of contracts, falling negotiations with the winning bidders, obtaining the applicable environmental and construction related permits and obtaining necessary approvals from the Texas and New Mexico Commission.

As you can see on the timeline, we anticipate bringing online 100 megawatts of generating capacity and time to meet our peak in 2022 and an additional 276 megawatts in time to meet our peak in 2023. The resource additions in 2023 include the 226 megawatt natural gas combustion turbine at an expected cost of $143 million. In addition, the Company may purchase 50 megawatts to 150 megawatts of wind and solar generated power to provide for fuel diversity and energy cost savings.

Turning to Slide 11. We've provided a timeline for the 2019 Texas cost recovery filings. As I mentioned earlier, on January 25, the Company filed its transmission costs recovery factor. The Company has invested approximately $53 million net of retirement on a Texas retail jurisdictional basis and transmission related infrastructure from October 1, 2016 through September 30, 2018 that's not currently reflected in rates.

Therefore, the Company is seeking to recover approximately $8.2 million through a surcharge. We currently anticipate receiving approval for the TCRF and the second half of 2019 based on the timelines of other utilities in Texas.

We also plan to file for approval to implemented distribution cost recovery factor in late March, 2019 for the costs incurred from October 1, 2016 through December 31, 2018. The Company will request authorization to recover distribution related infrastructure, not currently reflected in rates. We also anticipate receiving approval for the DCRF in the second half of this year. The timeline is subject to change since – this is our first time requesting approval under these recovery mechanisms.

I will now turn the call over to Nathan.

[Nathan Hirschi]

Thanks, Mary. If you will turn to Slide 12, I will briefly cover our key earnings drivers for the year compared to prior year. Beginning with the negative drivers, earnings was lower by $0.46 per share for the year, primarily due to net realized and unrealized losses on securities held in our Palo Verde decommissioning trust fund. This chart clearly demonstrates that the decline in the equity markets during the fourth quarter of 2018 had a significant effect on our annual earnings.

During the fourth quarter of 2018, the U.S. equity markets experienced the greatest overall fourth quarter decline since 2008. As we have discussed on previous calls, in 2018, we began recognizing unrealized gains and losses related to equity securities held in our MDT directly in the Company’s statement of operations as required by one of the recently adopted accounting standards.

The adoption of this new standard added the potential for significant earnings volatility and this is indeed what we experienced in the fourth quarter of 2018. As such, we have started reporting a non-GAAP financial measure, which backs out these gains and losses.

Earnings also declined in – for the year by $0.01 per share due to retail non-fuel based revenues. This reduction was primarily due to a refund of approximately $28.2 million for the reduction in the federal corporate income tax rates due to the Tax Cuts and Jobs Act of 2017. This was partially offset by $7.7 million base rate increase related to the final order issued in our 2017 Texas rate case.

After excluding these items, retail non-fuel based revenues had a solid increase of $19.8 million due to continued customer growth and favorable weather. Earnings for the year also declined by $0.11 per share due to increased depreciation and amortization expenses primarily due to increased plant balances.

Earnings declined by $0.10 per share, due to the Palo Verde performance rewards of $5 million associated with the 2013 to 2015 performance period, which was recorded in 2017. There was no comparable amount recorded in 2018. We also experienced a decline in earnings for the year primarily due to increased operation and maintenance expenses related to outage cost at our Rio Grande Power Station.

I would like to point out that even though O&M expenses were higher for the year during the fourth quarter earnings increased by $0.02 due to a decrease in maintenance and outage costs at our Newman Power Station when compared to the fourth quarter of 2017.

Turning the positive earnings drivers for the year, earnings increased by $0.41 per share due to the tax cuts and jobs act of 2017 that reduced the federal corporate income tax rate from 35% to 21%. Earnings for the year were also possibly impacted by decreased Palo Verde and O&M expenses primarily due to lower incentives and administrative and general benefits. As Mary mentioned earlier, we are pleased to report adjusted earnings of $2.33 per share for the year, which was at the upper end of our non-GAAP earnings guidance range.

Now turning to Slide 13. We have provided a comparative analysis of the percentage changes in the average number of customers and megawatt hour sales by customer class for 2018 as compared to 2017. We continue to see consistent growth in the average number of customers served during the year. The average number of customers served increased by 1.6% over prior year.

Megawatt hour sales also increased in 2018 by 2.4% over prior year. This increase was primarily due to a 5.9% increase in the residential customer class. Favorable weather during the second and third quarters served as a primary driver for the increase in the residential customer class.

If you will now turn to Slide 14, I will discuss the impacts of weather and more detail. The chart includes a comparison of normal weather to actual weather recorded in our service territory. As you can see, heating degree days in 2018 or 27.3% higher than the same period last year, but 5.8% below the 10-year average.

In 2018, cooling degree days were 8.8% higher than 2017 and 10.9% above the 10-year average. Above normal weather during our second and third quarters helped to boost sales and lead to an all-time megawatt hour sales record for 2018.

Turning to Slide 15, I'll briefly discuss our capital requirements and liquidity. On December 31, 2018 our liquidity was approximately $314 million, which consisted of a cash balance of approximately $13 million plus borrowings available on our revolving credit facility.

Our cash capital expenditures in 2018 for $240 million and we expect our 2019 expenditures to be approximately $249 million. As mentioned earlier in the presentation in 2018 we credit approximately $28 million to customers for the reduction in our federal corporate income tax rate.

In terms of cash dividends, we paid $57.5 million in cash dividends for the 12 months ended 2018. In addition, on January 31 our Board declared a quarterly cash dividend of $0.36 per share payable on March 29, 2019 to shareholders of record as of the close of business on March 15, 2019.

If you now turn to Slide 16, I would like to provide the latest five-year projections for our capital expenditures. The revision to our projections is primarily attributable to a reduction for the resources selected in our RFP process, partially offset by the inclusion of costs associated with AMI.

Over the next five years, we currently anticipate spending $1.3 billion which includes the construction of 228 megawatt natural gas combustion turbine scheduled for completion in 2023 at an expected cost of approximately $143 million. The projections also include $85 million of initial costs for the deployment of AMI which is comparable to spending by other utilities. This estimate is subject to change based on both legislative and regulatory approval.

Turning to Slide 17, we are initiating 2019 GAAP earnings guidance with range of $2.25 to $2.80. The midpoint of the range assumes 10-year average weather. The GAAP guidance range includes $6.3 million to $14.8 million I've realized and unrealized net gains for the NDT.

It is important to point out that so far this year, domestic and international equity markets have rebounded from the lower levels that we're seeing during the fourth quarter of 2018 after removing the estimated realized and unrealized net gains or non-GAAP guidance range is $2.10 to $2.45 per share.

As our service territory and our system grows, we continue to experience some regulatory lag, whoever utilizing the transmission and distribution costs recovery factors should help minimize the impact. Also, we have discussed on previous calls, it is possible that we may record a loss in the first quarter of 2019 due to seasonality of our business.

That concludes our prepared remarks. Andrea, could you please open this up for questions?

[Operator]

Thank you. [Operator Instructions] We will go first to Julien Dumoulin-Smith of Bank of America.

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

Hey, good morning. Can you hear me?

[Nathan Hirschi]

Yes. Good morning, Julien.

[Mary Kipp, President and Chief Executive Officer]

Yes. Good morning, Julien.

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

Hey, so a few follow-up questions if you can. First, let me just hit some of the details here on the credit side and the equity raise. Just how do you think about your sort of debt metrics where they are today? Obviously there's been some commentary already from the agencies, but where do you need to go? I know you said you're not going to be specific today about the total quantum of equity needed, but I just want to make sure we understand where you are today and where you need to go from a credit perspective? And I'm assuming that you want to sustain your current respective ratings.

[Nathan Hirschi]

That's right. Well, 2018 we still had free cash flow. We still did – we had a pretty good cash flow in 2018, but as you know, we will become a taxpayer in 2019 and that puts some pressure on us. We're not flowing back the excess for taxes yet. That will come. And we see this CapEx projections being higher in the next few years. So obviously, maintaining the balanced capital structure is a priority for us. And we see that as being – looking at maintaining, like you say, at least the – we're BBB from an S&P perspective. And that's a real focus, is to maintain that. And so as we go forward, that is a priority and that's why we're really focused on the equity issuance as a possibility for that.

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

Got it. Okay. And then let me come back to this twist as far as I perceive it with respect to the 50 to 150 megawatts, rather than the upside outside of the procurement rather is maybe the better way to say this, right? So you'd run the RFP. You are now close to results already. But then in the slides here you talk about purchasing, it seems like an additional quantum if you will, can you talk to that a bit?

[Mary Kipp, President and Chief Executive Officer]

Yes. This is Mary. Julien, I can talk about that a little bit. These are actually based on some bids that we received in the RFP process, but unfortunately they didn't have capacity associated with them. So they didn't need what was required in the current RFP analysis. However, what we’re thinking about doing and obviously a decision hasn't been made yet, but what we think is there, we could use them as fuel savings essentially. And that's where we are on that.

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

And then just to be clear here, obviously you awarded – or you are proposing to award PPAs here. Would this be a potential build-own-transfer situation? And actually maybe even to broaden this out, is the initially awarded RFP capacity potentially a build-own-transfer situation at all?

[Mary Kipp, President and Chief Executive Officer]

We're still looking at negotiating the contract so we can't speak to that yet. Obviously that's something that we would find very desirable, so whenever that's possible, we'll be looking at that.

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

And what's the timeline for that? Just if you don't mind reminding me just in terms of those – I know you have this little description broadly this year about when you're getting these contracts done. But the time line specifically around the build-own-transfer, BOT, piece of that maybe.

[Mary Kipp, President and Chief Executive Officer]

We’re negotiating contracts right now and we expect them to be done in the first half of the year.

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

Got it. Excellent. And then, sorry, one last one just with respect to the AMI effort. The timeline there, how are you thinking about, let's just say, assuming you get supportive legislation this year in the Texas legislature, what's the timeline to getting an AMI program deployed, shall we say, right, so starting from midyear this year onwards?

[Mary Kipp, President and Chief Executive Officer]

Yes. So assuming that we were able to get the approval of the legislature, which is obviously the key first step, and we're very hopeful we'll get it because we really think it's a huge benefit to our communities here in Texas. We would then begin an RFP process and we would expect to conclude that in the second half of the year. And then we would have to go in probably during the first half of 2020 to seek approval of our program. Then we'd start incurring costs in 2020 or 2021 including back office and customer technologies.

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

Got it. All right, excellent. I'll leave it there. Thank you all very much.

[Mary Kipp, President and Chief Executive Officer]

Thanks.

[Nathan Hirschi]

Thanks.

[Operator]

[Operator Instructions] We'll go next to Vedula Murti at Avon Capital.

[Vedula Murti, Avon Capital]

Good morning.

[Mary Kipp, President and Chief Executive Officer]

Hey, good morning.

[Nathan Hirschi]

How are you doing?

[Vedula Murti, Avon Capital]

Good. In the 2019 guidance, what level of a rate relief is assumed with regards to both and with regards to Texas as well both the transmission as well as the distribution?

[Nathan Hirschi]

Well, we recently filed the transmission cross recovery factor at about an $8.2 million, and we see a kind of a similar level for the distribution cost recovery factor. And then those – it will take about six months. We think this is the first time we're through that. So we're cautious about how the process spreads, but we think about six months. We should, we should be able to work through those process. So neither of those really come online until the – come on will affect it will be implemented until the second half of the year.

[Vedula Murti, Avon Capital]

Okay, because it looks like based on the way you file these things, so it seemed like the transmission one should be available for the summer peak while the distribution increase may not be there for the summer peak?

[Nathan Hirschi]

That's right. It will be the timing will make it difficult for the transmission and be there for the summer peak. We're hoping the tail end of summer. We would be able to get that the transmission and then toward the back end of summer would be to the distribution.

[Mary Kipp, President and Chief Executive Officer]

And the reason for the difference in time is for the distribution cost recovery factor. We have to have our annual earnings monitoring report filed with the commission because one of the criteria for that onto secret calories, you have to show you're not over earning and which we would not be. But we plan to file that as soon as we have that ready and hopefully by the end of March.

[Nathan Hirschi]

So this year we won't get as much as a benefit out of the transmission distribution cost recovery factor because first year and we delayed. But we're very excited going forward. This is a good way just kind of dig in a reduced the regulatory lag that we’re currently experiencing.

[Mary Kipp, President and Chief Executive Officer]

Firstly, because of a lot of our CapEx as you’ve seen in the slide, this going to be on the wire side, so we think this is a really positive development for the company starting to use these.

[Vedula Murti, Avon Capital]

No, I certainly appreciate that and understand that. But does a $16 million request under the assumption that does dollars in aggregate are approved? What's based on the timeline, how much realistically falls into 2019 versus 2020?

[Nathan Hirschi]

Well, again, I wouldn't get into specifics, but those are the general requests and it is the second half of the year, so.

[Vedula Murti, Avon Capital]

Okay. Also in terms of equity, what is the – in terms of your guidance, what's the share count assumption in terms of incremental equity for your 2019 guidance?

[Nathan Hirschi]

Yes. Well, again, we won't get into specifics on that because it is a range and we will – we put in like all the guidance includes a lot of factors around that. So I won't get into that. But we will just because we haven't come down to the detail on the amount of the equity issuance. But it was factored in there to some extent.

[Vedula Murti, Avon Capital]

So you filed the news about waiting on the request for the approval, it was up to $200 million. I guess can you help us in terms of timing wise in terms of how that over – what years or how you're thinking about that?

[Nathan Hirschi]

Yes. So the $200 million gives us some flexibility in the timing of when we would go in and again to do the – we haven’t come up with the specifics, but that is that amount we think gives us some flexibility on timing.

[Vedula Murti, Avon Capital]

Does that flexibility also contemplate the abilities for funding the equity if you’re able to reach an agreement with some of the RFP winners to build/buy like Julien was describing?

[Nathan Hirschi]

Yes. Well I think that comes back to the – what Mary was saying, that we are looking at negotiating those contracts. And we probably won't get into too much of the specifics of that.

[Vedula Murti, Avon Capital]

Okay. Thank you.

[Mary Kipp, President and Chief Executive Officer]

Thank you.

[Operator]

Next, we'll move to Chris Ellinghaus at Williams Capital.

[Mary Kipp, President and Chief Executive Officer]

Good morning.

[Christopher Ellinghaus, The Williams Capital Group]

Hey guys, how are you?

[Nathan Hirschi]

Hey Chris, good morning.

[Mary Kipp, President and Chief Executive Officer]

Good. How are you?

[Christopher Ellinghaus, The Williams Capital Group]

Good. Can you give us a little bit of color on what you’ve seen in first quarter, whether so far?

[Nathan Hirschi]

Yes. It was a little bit better than a little bit colder than last year, but a little bit, but still a below average and when it comes to the number of heating – slightly below average on the number of heating degree days. So it's a little better than last year, but still a little bit below average.

[Christopher Ellinghaus, The Williams Capital Group]

Okay. And can you give us any sense of what you've seen out of the Texas legislature so far in terms of AMI?

[Mary Kipp, President and Chief Executive Officer]

We had members of our local delegation carry the bill to the House and the Senate. So it's a political process though and so it's always subject to the human element, but we’re very, very helpful and we think that our leadership recognizes the benefits from this to our community.

[Christopher Ellinghaus, The Williams Capital Group]

Okay. And as far as you gave us some idea of what the DCRF might look like this year or are those numbers you think sort of what baseline annual numbers might look like? Are you that far behind that these might be a little bit above normal sort of going forward?

[Nathan Hirschi]

Well, I think that's right because this includes 24 months to 27 months of CapEx. And so going forward we would see more of an annual amount. So those amounts are probably on the higher side of what we would see going forward.

[Christopher Ellinghaus, The Williams Capital Group]

So maybe like half.

[Nathan Hirschi]

Yes, I mean it depends on our wire spent from, from year-to-year, but, but you know, in that kind of range.

[Christopher Ellinghaus, The Williams Capital Group]

Assuming your customer and low growth continues at similar rates up, that would maybe suggest about half would be with the going forward rate might be?

[Mary Kipp, President and Chief Executive Officer]

Yes, I think that's fair.

[Christopher Ellinghaus, The Williams Capital Group]

Okay. Thanks a lot. I appreciate it.

[Nathan Hirschi]

Thanks Chris.

[Mary Kipp, President and Chief Executive Officer]

Thank you.

[Operator]

And we'll take a follow-up from Vedula Murti at Avon Capital.

[Vedula Murti, Avon Capital]

Yes. My understanding is that there's an effort in the – with the legislature to empower the PUCT to be able to use forecasted test years for rate cases to help mitigate regulatory lag. I'm simply wondering, kind of what you're – what you're aware of about that effort and status and what you think the prospects are?

[Nathan Hirschi]

Well, one of the nice things we – in New Mexico, we have the opportunity of using forecast test. We historically not done that quite as much in order to – it because we still have growth in the service territory in that growth sometimes doesn't get better, you have to give that into the – in the filing.

Also when we do look at the – looking out to the combustion turbine in 2022, 2023, if there is a possibility of picking those up as post-test year adjustments an that – that we could see that as a potential benefit for us. So again, our growth helps us. That forecast test year doesn’t benefit us quite as much as some of our peers.

[Mary Kipp, President and Chief Executive Officer]

So I haven't heard anything specifically about future test years in the Texas legislature. So forgive my ignorance if that is the case. What I have discussed is the possibility of a generation rider. I know that some of the other utilities have been – trying to get that approved. But our main focus really has been on AMI as we think that's the most beneficial to our customers and our service territory.

[Vedula Murti, Avon Capital]

Yes. I think I was kind of referring to generation rider probably more in a broader context, but we're right now focused particularly on a generation rider. I guess how do you see that right now?

[Mary Kipp, President and Chief Executive Officer]

I'll go back to what I said on AMI. It's a political process and a lot of different groups have different interests in that. So we'll just have to see where it comes out.

[Vedula Murti, Avon Capital]

Thank you.

[Operator]

We will take a follow-up from Julien Dumoulin-Smith of Bank of America.

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

Hey. Sorry, guys, to follow up here. But I just wanted to clarify this. How do you think about your earned ROE baked into the 2019 guidance here? Again, I know you talk about normalized weather, but I just want to understand earned ROE expectations and how those are established? And I'm really principally obviously asking more on the distribution side than the transmission side, if you can kind of dig into that.

[Nathan Hirschi]

Yes. So again, we are having some regulatory lag. I would say if you look at the midpoint of our guidance, you have an earned ROE that's probably a rider right below 9%. So a little bit on the – below what – on a GAAP basis. And so that's still – we're still struggling with the regulatory lag, trying to improve that. We think, again, we're not, as we mentioned kind of earlier in the Q&A, that we're not really getting a significant benefit of that with the Transmission and Distribution Cost Recovery Factor this year, but that will go forward. But again, we still need to work and we're still having some regulatory lag that we need to try to improve on.

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

Got it. But the average reflected on the distribution side of the two jurisdictions is slightly below nine on the distribution side.

[Nathan Hirschi]

Well, we really don't do it, break it out by service, but that's our overall GAAP – our overall earnings is probably around just below the 9% range on a company-wide basis.

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

Got it. Excellent. I just wanted to clarify that.

[Operator]

And that does conclude the question-and-answer session. I'll turn the conference back over to management for any closing remarks.

[Lisa Budtke]

Thank you all for joining us on today's call. We look forward to seeing you in March at the Bank of America Merrill Lynch Conference in Boston, and please be safe.

[Operator]

And that does conclude today's conference. Again, thank you for your participation.