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El Paso Electric Co (EE) Q4 2018 Earnings Conference Call Transcript

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El Paso Electric Co (NYSE: EE)

Q4 2018 Earnings Conference Call

Feb. 27, 2019 , 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the El Paso Electric Company 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 -- Director of Treasury Services and Investor Relations

Thank you, Andrea, and good morning, everyone. Thank you for joining the El Paso Electric Company 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 do not, 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 28th. We would also like to inform you that we will be attending the Bank of America Merrill Lynch 2019 Power Utilities and Renewables Conference on March 5th 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 13th. 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 provision 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 these additional -- 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 the 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 E. 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 and 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 higher O&M costs at 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-hour sales recorded during the year. The record sales are a result of consistent customer growth, economic expansion in our communities, and favorable weather.

With regard to our desire to add renewable resources in a responsible and cost effective manner, we're pleased to report that the Holloman Air Force Base solar facility became commercially operational in October of 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 goals.

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-megawatt 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've recognized 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 ratings 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 notes. 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 utilized the Trust to finance our portion of nuclear fuel for Palo Verde. The net proceeds from the sale 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 13th, 2023.

Also in 2018, we were successful in 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 o f 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 objectives on Slide 7. In terms of regulatory objectives, we anticipate obtaining approval for our Texas transmission and distribution cost recovery factor in the second half of 2019. We filed our transmission cost recovery factor on January 25th and plan to file for approval of the distribution cost recovery factor in late March. Another important objective for 2019 is seeking the necessary regulatory approvals 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 31st, 2019. We anticipate filing that case using historical test year ended December 31st, 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 '19 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 of remaining non-ERCOT utilities, including El Paso Electric, to have the opportunity to seek regulatory approval of an AMI deployment plan and related cost 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 tools.

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 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 remarket 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 goals, 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 asset, 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 microgrid development initiatives.

Our 2019 objectives also include reaching a 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 out our high level of customer service by improving our engagement efforts through a new -- through new website and billing options. As you can see, 2019 will be a busy and challenging year, but we're already working hard toward accomplishing these objectives. Many of our goals are tied to the continuous growth we are 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 '19 out of the last 20 years.

Due to the 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 an anticipated timeline for the approval and commercial operation date for the resources selected in our RFP. On June 20th -- excuse me, on June 30th, 2017, EPE issued an All Source RFP to select additional, long-term, cost effective, and reliable electric resources to commence operations 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 a 226 megawatt natural gas combustion turbines at the Company's Newman Power Station. The selected proposals are subject to the execution of contracts, following negotiations with the winning bidders, obtaining the applicable environmental and construction-related permits, and obtaining necessary approvals from the Texas and New Mexico Commissions.

As you can see on the timeline, we anticipate bringing online 100 megawatts of generating capacity in time to meet our peak in 2022 and an additional 276 megawatts in time to meet our peak in 2023. The resource additions in 2022 include -- excuse me, 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 25th, the Company filed its Transmission Cost Recovery Factor. The Company has invested approximately $53 million net of retirements on a Texas retail jurisdictional basis in transmission related infrastructure from October 1, 2016 through September 30th, 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 in the second half of 2019 based on the timelines of other utilities in Texas. We also plan to file for approval to implement a distribution cost recovery factor in late March 2019 for the costs incurred from October 1, 2016 through December 31st, 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 T. Hirschi -- Senior Vice President and Chief Financial Officer

Thanks, Mary. If you'll 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 funds. 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 US 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 NDT 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 significan t 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 the -- 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 200 -- sorry $28.2 million for the reduction in the federal corporate income tax rate 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 periods which was recorded in 2017. There was no comparable amount recorded in 2018.

We also experienced decline in earnings for the year, primarily due to increased operation and maintenance expenses related to outage costs at our Rio Grande Power Station, I'd 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 to 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 positively impacted by decrease Palo Verde O&M expenses primarily due to lower incentive and administration 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 change 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 quarter 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 in more detail. The chart includes a comparison of normal weather to actual whether recorded in our service territory. As you can see, heating degree days in 2018 were 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 will briefly discuss our capital requirements and liquidity. On December 31st, 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 capital -- our cash capital expenditures in 2018 were $240 million and we expect our 2019 expenditures to be approximately $249 million.

As mentioned earlier in the presentation, in 2018 we credited 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 31st, our Board declared a quarterly cash dividend of $0.36 per share payable on March 29th, 2019 to shareholders of record as of the close of business on March 15th, 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 a 228-megawatt hour -- megawatt natural gas combustion turbines 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 a 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 of 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 were seen during the fourth quarter of 2018. After removing the estimated realized and unrealized net gains our 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, however utilizing the transmission and distribution cost 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?

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll go first to Julien Dumoulin-Smith at Bank of America.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. Can you hear me?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Yeah. Good morning Julien

Mary E. Kipp -- President and Chief Executive Officer

Yeah, good morning.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

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 -- and where do you need to go? I know you said that you're not going to be specific today about the total quantum of equity needed, but 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 T. Hirschi -- Senior Vice President and Chief Financial Officer

That's right. Well, you know 2018, we still have free cash flow, we still did -- had a pretty good cash flow in 2018. But as you know, we will become a taxpayer in 2019 and that put some pressure on us. We're not flowing back the excess deferred taxes yet; that will come. So -- and then 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 then, and we see that as being -- looking at maintaining, like you say, the at least the -- we're at 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 issuances as a possibility for that..

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. Okay. And then let me come back to this twist as far as I perceive it with respect to the 50 megawatt to 150 megawatts or rather the -- upside of the procurement rather is maybe the better way to say this. Right. So you'd run the RPF, you announced those results already. But then in the slides here, you talk about purchasing, it seems like an additional quantum if I -- if you will. Can you talk to that a little bit?

Mary E. Kipp -- President and Chief Executive Officer

Yeah, 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 meet what was required in the current RFP analysis. However, what we would --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 in that.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

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

Mary E. Kipp -- President and Chief Executive Officer

You know 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 -- Analyst

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

Mary E. Kipp -- President and Chief Executive Officer

So we are 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 -- Analyst

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 a 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 mid-year this year onwards.

Mary E. Kipp -- President and Chief Executive Officer

Yeah. So, assuming that we are 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 a program. And then we'd start incurring cost in 2020 or 2021 including back-office and customer technologies.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

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

Mary E. Kipp -- President and Chief Executive Officer

Thanks, Julien.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Thanks, Julien.

Operator

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

Vedula Murti -- Avon Capital -- Analyst

Good morning.

Mary E. Kipp -- President and Chief Executive Officer

Hey, good morning.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

How're you doing?

Vedula Murti -- Avon Capital -- Analyst

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

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Well, we recently filed the transmission Cost Recovery Factor at about an $8.2 million. And we see kind of a similar level for the distribution Cost Recovery Factor and then those we -- 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 works. But we think about six months, we should be able to work through those process. So neither of those really come online until the -- come on -- will affect -- will be implemented until the second half of the year.

Vedula Murti -- Avon Capital -- Analyst

Okay, because looks like based on the way you've filed these things, it would seem like transmission one should be available for the summer peak while the distribution increase may not be there for the summer peak.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

You know that's why -- it will be the timing will make it difficult for the transmission to be there for the summer peak. We're hoping that the tail end of summer, we would be able to get the transmission and then toward the back end of summer would be the distribution.

Mary E. Kipp -- President and Chief Executive Officer

And the reason for the difference in timing 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 to seek recovery is you've 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 T. Hirschi -- Senior Vice President and Chief Financial Officer

So this year, we won't get as much as a benefit out of the transmission distribution Cost Recovery Factor because of first year and we delayed. But we're very excited that going forward, this is a good way, just kind of dig in, reduce the regulatory lag that we're experiencing.

Mary E. Kipp -- President and Chief Executive Officer

Especially because a lot of our CapEx, as you've seen in the slides is going to be on the wire side. So we're -- we think this is a really positive development for the Company starting to use these.

Vedula Murti -- Avon Capital -- Analyst

No, I certainly appreciate that and understand that but of the $16 million request under the assumption that the -- this dollars in aggregate are approved. But based on the time line, how much realistically falls into '19 versus '20?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

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

Vedula Murti -- Avon Capital -- Analyst

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 T. Hirschi -- Senior Vice President and Chief Financial Officer

Yeah. 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 we 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 -- Analyst

Also you probably -- 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 the -- over what years or how are you thinking about that?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Yeah. Well -- so the $200 million gives us some flexibility in the timing of when we would go in. And again, Vedula 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 -- Analyst

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-to-buy like as Julien was describing?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Yeah, well, I think that comes back to the -- what Mary was saying that we are looking at some negotiation -- looking at negotiating those contracts, and we probably won't get into too much of the specifics of that.

Vedula Murti -- Avon Capital -- Analyst

Okay, thank you.

Operator

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

Chris Ellinghaus -- Williams Capital -- Analyst

Hey, guys how are you?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Hey, Chris. Good morning.

Mary E. Kipp -- President and Chief Executive Officer

How are you?

Chris Ellinghaus -- Williams Capital -- Analyst

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

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Yeah, it was a little bit better than -- a little bit colder than last year, but a little bit -- but still below average 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 little bit below average.

Chris Ellinghaus -- Williams Capital -- Analyst

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 E. Kipp -- President and Chief Executive Officer

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

Chris Ellinghaus -- Williams Capital -- Analyst

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

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Yes, 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.

Chris Ellinghaus -- Williams Capital -- Analyst

So maybe like half?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

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

Chris Ellinghaus -- Williams Capital -- Analyst

Assuming your customer and low growth continues at similar rates that would maybe suggest about half would be what the going forward rate might be.

Mary E. Kipp -- President and Chief Executive Officer

Yeah, I think that's fair.

Chris Ellinghaus -- Williams Capital -- Analyst

Okay, thanks a lot. I appreciate it.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Thanks, Chris.

Mary E. 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 -- Analyst

Yes, my understanding is that there is 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 aware about that effort and status and what you think the prospects are?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Well, one of the nice things, we -- in New Mexico, we have the opportunity of using forecast tests. So we've historically not done that quite as much in order to -- because we still have growth in the service territory and that growth sometimes doesn't get back or you have to give that into the -- in the filings.

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-year adjustments and that -- that we could see that as a potential benefit for us. So again, our growth helps us. That forecast test years doesn't benefit us quite as much as some of our peers.

Mary E. Kipp -- President and Chief Executive Officer

So, Vedula, I haven't heard anything specifically about a future test years, in the Texas Legislature, so forgive my ignorance if that is the case. What I have heard discussed is the possibility of 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 AMIs. We think that's the most beneficial to our customers and our service territory.

Vedula Murti -- Avon Capital -- Analyst

Yeah, I think I was kind of referring to generation rider, probably more broader context. But did you -- if it's -- we are right now focused particularly on a generation rider. I guess what -- how do you see that right now?

Mary E. Kipp -- President and Chief Executive Officer

You know, 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 -- Analyst

Thank you.

Operator

We'll take a follow-up from Julien Dumoulin-Smith with Bank of America.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

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 '19 guidance here? Again, I know you talked 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 distribution side than the transition side, if we can kind of dig into that?

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Yeah. So again well we are -- 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 right below 9%, so a little bit -- a little bit on the below what -- on a GAAP basis. And so that's still -- we're still struggling with 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, that -- 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 -- Analyst

Got it. But the average reflected on the distribution side between the two jurisdictions is slightly below 9% on the distribution side.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

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 Companywide basis.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. All right, excellent. I just wanted to clarify that.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

All right.

Operator

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

Mary E. Kipp -- President and Chief Executive Officer

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.

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

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

Duration: 40 minutes

Call participants:

Lisa Budtke -- Director of Treasury Services and Investor Relations

Mary E. Kipp -- President and Chief Executive Officer

Nathan T. Hirschi -- Senior Vice President and Chief Financial Officer

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Vedula Murti -- Avon Capital -- Analyst

Chris Ellinghaus -- Williams Capital -- Analyst

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