埃克西爾能源 (XEL) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Xcel Energy 2017 Year-End Earnings Conference Call. Today's call is being recorded.

And now, your host for today's conference, Mr. Paul Johnson, Vice President of Investor Relations. Mr. Johnson, please go ahead, sir.

Good morning and welcome to Xcel Energy's 2017 year-end earnings release conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; and Bob Frenzel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team available to answer your questions.

This morning, we'll review our 2007 (sic) [2017] results, discuss tax reform and update you on recent business and regulatory developments. Slides that accompany today's call are available on our website. As a reminder, some of the comments during today's conference call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our filing with the SEC.

In addition, on today's call, we will discuss certain ongoing earnings metrics that are non-GAAP measures. Our ongoing earnings and EPS exclude a $23 million or 6 -- excuse me, $0.05 earnings per share one time charge related to the Tax Cut and Job Act. The comparable GAAP measures, a reconciliation to GAAP and an explanation of these charges are included in our earnings release, which is available on our website.

With that, I'll turn the call over to Ben.

Well, thank you, Paul, and good morning to everyone. I hope everybody enjoyed the Super Bowl. We certainly enjoyed hosting it in Minneapolis, glad the lights stayed on. And while our Vikings weren't in the Super Bowl, it was a fun event. And I think at Xcel Energy, we had a Super Bowl year in 2017, performing fantastically, financially, strategically and operationally.

I wanted to start with some of the key accomplishments and recognize the outstanding efforts of our employees in 2017. We successfully completed CapX2020, a 13-year project entailing over 800 miles of transmission lines, $2 billion of investment and working with 11 different utilities. Our nuclear operations had one of its best performance years, achieving a capacity factor of 91%, while reducing refuel outage times and lowering cost. Xcel Energy was named the #1 utility wind energy provider in the United States by AWEA for the 12th consecutive year.

We were named a Military Times Best for Vets employer for the fourth consecutive year, ranking 19th on a list of 82 companies that received that honor. We successfully completed our multiyear SAP implementation, which included a new general ledger and work asset management system. This is part of our Productivity Through Technology initiative, which will drive efficiency and lower our cost structure.

And not to diminish our financial results, we had another strong year with ongoing EPS of $2.30 in 2017, which is the midpoint of our guidance. This was our 13th consecutive year of meeting or exceeding our earnings guidance. Finally, we also raised our dividend by 5.9%, which represents the 14th straight year we increased our dividend.

Tax reform is all over the news, and I wanted to give you our high level overview of the key points, and Bob will provide more details later. We believe that tax reform is beneficial to our customers and will result in lower revenue requirements, which provides the opportunity to reduce customer bills, make additional investments in areas that are important for our customers and take actions to preserve our credit ratings. We expect tax reform will be mildly accretive to our earnings over the next 5 years, as it essentially adds approximately $1.3 billion to our rate base.

We are reaffirming our 2018 EPS guidance range of $2.37 to $2.47 and our long-term EPS growth rate of 5% to 6% and dividend growth of 5% to 7%. Finally, we do not anticipate any changes in our strategy to lead the clean energy transition, while keeping customer bills low.

We introduced our steel-for-fuel strategy back in 2016, and it's been a great success. And let me provide you with some recent updates. Last year, we introduced our Colorado Energy Plan. The plan, which is supported by a wide range of stakeholders, calls for the addition of up to 1,000 megawatts of wind, 700 megawatts of solar and 700 megawatts of natural gas or storage as well as the early retirement of 2 of the coal units at our Comanche Plant.

This is an opportunity for Xcel Energy to continue to transition its energy supply portfolio in Colorado with no increase in customer bills. Implementation of the Colorado Energy Plan will allow us to achieve, by 2027, an energy mix of 55% renewables and a 60% carbon reduction. In November, we received bids from our RFP. While we're still in the process of evaluating the bids, we were pleased with the robust number of bids and the attractive pricing.

We were pleased to see the levelized median bids from wind coming at approximately $18 per megawatt hour, while solar proposals were just under $30 per megawatt hour. Bidders have just responded to the option to refresh their pricing for tax reform and solar tariff considerations. Hearings are scheduled for this week, and we expect a commission decision on the settlement in March. Assuming the commission approves the settlement, we will file our recommended portfolio in April with a final commission decision expected this summer.

Next I'll provide a quick update on our SPS wind proposal, which includes 1,000 megawatts of our self-build wind in Texas and New Mexico and a 230-megawatt wind PPA. In New Mexico, we reached a settlement with various parties, which has been filed with the commission. Hearings on the settlement were held in December. At the request of the hearing examiner, we provided analysis of the effect of tax reform, which clearly shows the project still result in meaningful customer savings.

We've also reached a settlement in principle with parties in Texas and are working on finalizing the documents. There are no significant issues outstanding, and we plan to file the settlement with the Texas Commission shortly. We expect final decisions from both commissions by the end of the first quarter of this year.

With that, let me turn the call over to Bob, who'll provide more detail on our financial results and outlook and a regulatory update. Bob?

Thanks, Ben, and good morning, everyone. My comments will focus on full year 2017 results. And for details of our fourth quarter results, please see our earnings release.

As Ben indicated, we realized another strong year of operational and financial performance, and delivered 2017 ongoing earnings of $2.30 per share compared with $2.21 per share of ongoing earnings in 2016. The most significant earnings driver for the year include: higher electric and natural gas margins, which increased earnings by $0.19 per share largely due to rate increases and nonfuel riders to recover our capital investments; lower effective income tax rate, which increased earnings by $0.12 per share.

Please note the lower effective tax rate is partly due to an increase in wind production tax credits which flow back to our customers through electric margin. Lower O&M expenses and a higher AFUDC equity combine to increase earnings by $0.06 per share.

Partially offsetting these positive drivers were increased depreciation expense, largely due to capital additions, which reduced earnings by $0.21 per share and higher interest expenses, property taxes and other items netted to reduce earnings by $0.07 per share.

Turning to sales. Our weather and leap year adjusted electric sales increased 0.1% for 2017. Natural gas sales increased 2.7% in 2017 on a weather and leap year adjusted basis. Our 2017 gains in electric and natural gas sales are largely driven by the large C&I segments across our operating companies.

We continue to see positive customer growth in our service territories for both the electric and the natural gas businesses. But that growth has generally been offset by lower use per customer primarily in the residential sector, largely attributable to improvements in energy efficiency.

We realized another strong year of cost management, as we continued to improve efficiency across our businesses. We improved operations and lowered costs predominantly in our nuclear and fossil generation fleets. And we were able to offset the $0.04 adverse impact of weather in 2017 as compared to normal. Our commitment to continuous improvement and Productivity Through Technology has resulted in our 2017 O&M expenses being slightly below 2014 levels. This is consistent with our longer-term objective of keeping O&M flat across all of Xcel Energy.

Now let me provide a quick update on our pending rate cases. In Colorado, we have an electric case seeking $245 million rate increase over a 4-year period. Interim rates are expected to be effective in June of 2018. We also have a multiyear natural gas case in Colorado seeking $139 million increase over a 3-year period. Interim rates were implemented in January. We have a pending electric case in Texas seeking a net rate increase of $55 million. We anticipate a commission decision in the third quarter of 2018 with final rate to be implemented retroactively to January of 2018. And finally, we have a pending electric case in New Mexico seeking a $43 million rate increase. We anticipate a decision and implementation of final rates in the second half of 2018.

All of these rate proceedings were filed before the new tax legislation was proposed. In these cases and in other jurisdictions, we're having active discussions and formal proceedings with our regulators regarding the impacts of the Tax Cuts and Jobs Act and how we'll provide the expected benefits to our customers. As we progress through these conversations, we'll keep our stakeholders apprised of the outcomes, which we expect to be constructive.

With that, let me spend just a few minutes on the potential impacts of the new law. For more information, please see our earnings release, which has an extensive disclosure. However, let me start with a few key takeaways. As Ben said earlier, we believe tax reform is beneficial to our customers due to lower revenue requirements. We also expect to be able to offset the lower tax shield on holding company debt and deliver on our earnings guidance this year. The lower corporate tax rate reduces the value of the wind production tax credit to our customers. However, we have identified offsets in our projects and they continue to remain very beneficial to our customers.

Finally, in a static analysis, the tax law changes will reduce cash from operations and adversely impact our credit metrics. However, any near-term impacts will be largely dependent on regulatory actions taken as a result of the new tax law. We're very focused on credit quality and maintaining a strong balance sheet, which provides our companies access to capital at reasonable terms and reduces the cost of capital for our customers.

We're actively working with our regulators to develop plans and alternatives, which would provide our customers with the benefits of tax reform while maintaining strong credit metrics. Some of the potential actions include: accelerated asset depreciation or amortization; higher authorized equity ratios or ROEs at our regulated utilities; deferral or avoidance of future rate cases; and potential additional investment in areas of focus for our regulators.

Ultimately, tax reform results in lower taxes -- lower deferred taxes and correspondingly lower cash flow metrics. In a response, we expect to moderate our 5-year capital expenditure plan by $500 million and issue up to $300 million of additional equity. Even with the reduction in capital expenditures and the modest equity issuance, we project rate base growth of 6.5% and our earnings growth will be at the upper end of our 5% to 6% target.

The ultimate amount of any equity issuance and changes in capital expenditures will depend on regulatory actions of our various state commissions. We anticipate that these revisions to our plan and implementation of some of the proposed regulatory actions will result in a consolidated FFO to debt of 17% to 18% over the 5-year time period prior to any rating agency adjustments and should be sufficient to maintain strong credit ratings.

With that, I'll wrap up. In summary, 2017 was another great year for Xcel Energy. We delivered ongoing earnings within or above our guidance range for the 13th consecutive year. We increased our dividend for the 14th straight year. We realized a 1% decrease in O&M expenses. We resolved several regulatory proceedings, including a multiyear electric case in Minnesota, decoupling an advanced grid proposals in Colorado and an electric and natural gas case in Wisconsin.

We continue to execute on our steel-for-fuel strategy. We received regulatory approval for 1,550 megawatts of new wind in the Upper Midwest, proposed to build a 300-megawatt wind farm in South Dakota and reached settlements in principle for the 1,230 megawatts of wind in Texas and New Mexico. We reached a settlement with a diverse group of stakeholders on the Colorado Energy Plan, which proposes the addition of renewable projects and the retirement of 2 coal facilities.

We are well positioned to deliver on our 2018 ongoing earnings guidance range of $2.37 to $2.47 per share, our 5% to 6% earnings growth objective and our 5% to 7% dividend growth objective.

This concludes our prepared remarks. Operator, we'll take any questions.

(Operator Instructions) And for our first question, we go to Julien Dumoulin-Smith with Bank of America Merrill Lynch.

This is Josephine actually hopping in here for Julien. I just have a quick question. I think you said that with tax reform, your new rate base growth that you're looking at is 6.5%, hitting the upper end of the 5% to 6% EPS growth rate. I was wondering with the Colorado Clean Energy plan, what is then the further CapEx upside from that translate into your new rate base growth?

So the question is if CEP, which is not in our base CapEx, if that's improved, what will that do to rate base growth?

Exactly, like how much further up can it go?

I think that really depends on what we see in ultimate and final bids from the process, which are still pending. I think a good estimate is probably 50 basis points higher in rate base CAGR.

Got it. Great. And then just on the equity issuance, you just said $300 million in addition to the $385 million that you'd announced I think on the third quarter. Would that then still be as part of the DRIP? Are you just expanding the DRIP?

No, I don't think -- I think the DRIP at $385 million as we indicated in our third quarter call was likely sort of the large size of the dividend reinvestment program. I think the $300 million we'd contemplate in a market issuance.

Got it. Great. And then one last question. Just I think you'd mentioned earlier in 8-K that you were thinking of trying to increase the equity ratio as part of the tax reform mitigation strategy. Have you had any conversations with the commissions on that subject? And do you see that as a possibility?

Yes. This is Ben. I think we've had, obviously, preliminary, but constructive dialogues with all of our regulators. And I think the importance of strong credit ratings is not lost on them. So higher equity ratios is a dialogue we're having at SPS. And I think there'll be other dialogues around higher equity ratios potentially, maybe increased amortization, which also contributes to cash flow. And I think our regulators are going to look at tax reform. Everybody recognized the benefits to the consumer. But I think they're going to also make sure that balance sheet stays strong. So we're encouraged by what we've heard so far.

Got it. And that's not yet, like the assumptions of a higher equity ratio are not yet reflected in the 5% to 6% EPS growth rate, right?

Well, I mean, that's -- I think, one of the things that we would hope for is that if the $400 million of revenues that we're going to stream ultimately back to the consumers, if we get higher equity ratios, et cetera, that could help offset the tax shield difference that we have with the Holdco.

And for our next question, we go to Travis Miller with Morningstar.

I was wondering on the tax reform stuff, again. What's the chance that incorporating those in rates and getting through the regulatory process might delay some of the decisions and some of the rate increase you're expecting in 2018 and even maybe early 2019? Give me a sense of timing there and how regulators are approaching that?

Travis, this is Bob. We've had a lot of constructive dialogues across almost all of our jurisdictions at this point, particularly the ones where we've got pending rate cases with Texas, New Mexico and the 2 cases in Colorado. I think the regulators and the stakeholders in all those cases are contemplating the impacts of tax reform, either as parts of those cases or as adjuncts to those cases. So I don't think it impacts the timing or the estimate of our rate case revenues that we're expecting in either '18 or '19. I guess, the one consideration, I'd say there is, our filed case or our filed testimony in South Dakota contemplates potentially we're under-earning in South Dakota and it contemplates potentially not filing a rate case as part of tax reform.

Okay. And what about Minnesota? How would you go about the regulatory process there given the...

There will be a docket in Minnesota, Travis, to discuss the effects of tax reform. We're still in the multiyear plan. But we'll figure out a way to account for that, either through accounting deferral or some actual actions. In Colorado, if that's your next question, we're having dialogues right now as we're in an active rate case. And we have settlements, not unanimous settlements, that we'll be presenting to the commission. And back to my earlier comment about constructive dialogue, I think, our commissions appreciate that we're bringing them options and essentially, this is complicated, educating them on the full holistic implications of tax reform.

Travis, one other thing I'd just say, and I point you to the earnings release, we put an entire page of where we are in dialogue with each of our regulatory jurisdictions that should give you a pretty good guide as to the conversations we've had to date and where we expect those to go over the next sort of 3 to 6 months.

And for our next question, we go to Jonathan Arnold with Deutsche Bank.

It's actually Constantine Lednev on Jonathan's behalf. Actually, just a quick question on the equity issuance. The 2018 guidance doesn't assume a share count, and you mentioned a $300 million of incremental issuance. Is that going to be spread over the 5 years? Or is it kind of more lumped together to the front or the back end somewhere?

We haven't actually spent a lot of time on pinpointing exact dates. It's probably more front-loaded than backloaded. But it really will depend on the conversations with both the regulatory agencies and how we approach tax reform and credit in our operating companies as well as the conversations we have with the rating agencies following those conversations. So I wouldn't expect it to be backdated. But we do affirm that the $237 million, $247 million is good for this year.

Okay. And I guess, the same comment goes for the $500 million of CapEx, right?

Yes. Similar comments. Again, I'd say the capital is probably a '19, '20, '21 issue. Most of the stuff in '18 is underway and in progress. But I think that any trimming of capital is probably a little bit more backdated in the plan.

I think too, just to add to that $500 million, it's really maybe a quiet story at Xcel. But we are really improving our supply chain efficiency. You're seeing that in our results with O&M. But you're also going to see that in our ability, I think, to on a per unit basis, get things done more efficiently. I can't be more pleased with how well our nuclear operations are performing, both operationally and financially. And when you become more efficient, you can get more done, and you can get more done with less capital. So we don't have any specific projects targeted to take out now, we just know there are opportunities to do that.

Okay. Great. Yes, I think the other question's already answered, both on the remarks and the Q&A.

For our next question, we go to Joe Zhou with Avon Capital Advisors.

It's is Andy Levi. Anyway, just 2 clarification questions because I've kind of been bopping on and off. So just on the $300 million of incremental equity, I heard the initial comments just a moment ago. So what you're saying is, because I'm just trying to get a sense of timing, that first, you kind of want to go through the regulatory process the next couple months, see where that kind of falls out and then decide the timing on and, well, we know the amount but the timing of the equity, is that what you're saying?

I think that's right. I mean, I'll let Bob add. But the point is -- and I think you picked up on it, Andy. This is an iterative process. We need to have the conversations with our regulators. They need to give us the signals on what's important to them. And I do think credit quality will be important to them. So again, as I mentioned earlier, we're having, I think, good preliminary dialogues across the board in all of our 8 states.

Bob, do you have any additional comment?

No, I think, Ben got it all.

Okay. And then just kind of sticking with that, so -- and so you get through your discussions and you figure things out. And then Bob mentioned it will be front-end loaded. The last time you did block equity or you did a larger chunk of equity that was not ESOP or DRIP, did you do an at the money, or did you kind of just do a block or I don't remember?

I think the last equity issuance and I'm looking around the room -- the last equity issuance predated me, but I believe it was an at the money issuance, that's at market issuance, though.

Yes, it was.

And again, I'm not trying to put words in your mouth, and I don't know what you're comfortable saying. But would that be a similar conduit that you would issue equity? Or could be we possibly see a block at some point, just to get it done?

Andy, I'd consider all opportunities to get it done effectively. But you know -- an at the market is probably the base case, and we see what the alternatives look like.

You think about it, Andy. I mentioned that essentially tax reform adds $1.3 billion to our rate base. But that's even after -- that's net of reducing CapEx by $500 million. So it's not a lot of equity to support credit ratings. And we are committed to credit ratings. But that's why, at the end of the day, even with modest amounts of equity, assuming we have constructive dialogues with the regulators, which I think we are having, this will be accretive to our earnings growth.

I know. And I don't -- you're, I guess, you're missing what I'm trying to get. I mean, I think $300 million is not a relevant amount. And obviously, the story is more than intact, if not getting better, which lead to my next question.

I'm just trying to get a sense of timing, because that's kind of important too and whether it's just a block or not, or perhaps -- it makes just a little bit of difference as far as trading dynamics when we get to that point? So that was what I was getting at.

And then my other question, and I think it was asked earlier, but I wasn't clear on what I heard, that's my fault. So whether it's Colorado or some of the other initiatives you have out there that are pending on the regulatory side that we have not got final approval. You may have settlements in whatever it may be. But those would be incremental to the 5% to 6% growth rate -- I'm not saying you'll grow more than 5% to 6%, but that those projects are not contemplated currently in that 5% to 6%. Is that correct or not?

Andy, all the -- the only thing that's outside of our capital forecast is the Colorado Energy Plan. So that's the only capital that's outside of our -- or things outside of our...

That's still pending regulatory-wise?

That is correct.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Frenzel, I will turn the conference over to you for any closing remarks.

Thanks everyone for participating in our earnings call this morning. Please contact our Investor Relations team with any follow-up questions.

Thanks a lot.

And again, ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect.