埃克西爾能源 (XEL) 2003 Q2 法說會逐字稿

Good morning. My name is Kristi and I'll be your conference facilitater. At this time I would like to welcome everyone to the Xcel Energy second quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad. If you would like to withdraw your question, press star and then the number 2 on your telephone key pad. Thank you. Mr Kolkmann, you may begin your conference.

Thanks, Kristi and I would like to welcome everyone to Xcel Energy's second quarter 2003 earnings release conference call. I am Dick Kolkmann, Managing Director of Investor Relations and with me today is Dick Kelly, Vice President and CFO of Xcel Energy. In addition we have several others here in the room to help us provide answers to your questions. Some of the comments that will be made contain forward looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and Xcel and NRG Energy filings with the Securities and Exchange Commission.

As we disclosed in our earnings release, Xcel Energy's second quarter 2003 earnings are preliminary at this time pending review of energy results for the quarter as to amounts that are attributable to activities prior to and conditions as of NRG's bankruptcy filing date of May 14th, 2003. Due to NRG's bankruptcy, Excel Energy now reflects NRG results on an equity accounting method after May 14th. Subject to certain limitations as discussed in our earnings release. Prior to the bankruptcy filing date Xcel Energy must reflect all NRG losses without limitation. NRG recorded significant impairment in other losses in the second quarter 2003 and we have not yet completed our assessment of whether our equity in NRG loses for the quarter would exceed the limitations.

Consequently, Xcel Energy considers its second quarter NRG earnings impact to be preliminary. The final second quarter 2003 results including any adjustments resulting from the review of NRG losses for amounts related to pre-bankruptcy activities and conditions will be reported in Xcel Energy's second quarter 10 q to be filed with the Securities and Exchange Commission later In August, 2003. The equity and NRG's losses reflected in this release is at the level of limitations consistent with the proposed $752 million settlement. For more information, you can refer to notes 2 and 5. Now I will turn the call over to Dick Kelly.

Thanks, Dick. It is unusual for us to do an earnings release this late after the quarter and to have it on a Friday is even more unusual. I don't want you to read anything into this because we had an off site planning meeting that ran from Monday to Wednesday and today was the first practical opportunity after the meeting. What I plan to do today is discuss the earnings for the quarter, reaffirm our annual earnings guidance, provide an update on liquidity and financing plans and brief you on expectations for NRG's bankruptcy schedule. Let's start with earnings release.

For the second quarter of 2003 Excel Energy reported a loss of 42 cents per share on a GAAP basis compared with earnings of 23 cents per share in 2002. Excluding the impact of NRG, Xcel Energy's earnings from continuing operations were 17 cents per share for the second quarter of 2003 compared with 32 cents per share for the second quarter 2002. Our utility subsidiaries provided earnings of 20 cents per share for the quarter compared with 35 cents per share last year. A decline of 15 cents per share is largely due to the following items: The effects of cooler temperatures reduced earnings by 5 cents per share, our O&M expenses decreased by 6 cents per share, increased interest expense reduced earnings by 4 cents per share and dilution decreased earnings by 1 cent per share. We, like most utilities in the midwest, experienced very moderate temperatures throughout our service territories in the second quarter.

The comparisons are especially striking when compared to last year which had favorable weather. In Colorado we had 75% fewer cooling degree days than last year and 51% less than normal. In Minnesota we had 55% less cooling than last year and 30% less than normal. In Texas we had 27% less cooling than last year and 9% less than normal. Turning to O&M. Our O&M expenses were higher by $38 million for the quarter, but this does not represent the underling trend. Last year our forecast indicated we were not going to achieve our financial goals, so we reversed our year to date incentive compensation accruals in the second quarter of 2002. This accounts for $13 million of the deviation.

At the end of March 2003 our board of directors granted performance based restrictive stock units to the members of the management team instead of granting options as we had done in previous years. Accordingly we booked the expense associated with this restrictive stock units during the second quarter of 2003. This year we also experienced increased expenses for other benefit costs including lower pension credits and increased medical costs. In addition, our outage costs for the quarter were higher due to a refueling outage at our Monticello nuclear plant during 2003, although this was partially offset by lower non-nuclear outage costs. There were no refueling outage in the second quarter of 2002.

Turning to interest, last year during the third quarter we issued approximately $1.4 billion of long-term debt reducing our reliance on short-term debt. The average interest rate of the long-term debt was 8%. In addition, we issued $230 million of convertible notes at the holding company in November of 2002. This increased our interest expense approximately $26 million before tax for the second quarter. Our other non-regulated subsidiaries and holding company costs resulted in a 3 cent per share loss for the second quarter, essentially flat compared to last year. Now let's turn our attention to NRG.

As Dick Kolkmann said earlier, NRG's numbers are subject to change. Xcel Energy's share of NRG's loss for the second quarter 2003 was 59 cents per share compared with the 9 cent loss per share in 2002. During the quarter, NRG reported additional asset impairments relating to several projects including Loyang, [INAUDIBLE], Brasos Valley and the Connecticut plants. As a result of recording our share of NRG losses for the second quarter Xcel Energy's negative investment in NRG is now at a level that corresponds to our proposed settlement with NRG and it's creditors. Based on equity accounting rules this serves as a cap. In other words, assuming the settlement agreement and the bankruptcy proceeding progresses expected we do not anticipate recording further losses from NRG. I now want to turn to our outlook for the year. As you can imagine we manage operations on an annual basis.

Timing of expenses and weather can increase the volatility of a quarter. After the first quarter several analysts suggested that we increase our earnings guidance because we had a good quarter. We didn't change our guidance. I've been around long enough to know one quarter doesn't make a year. For the first quarter our per forma earnings were 5 cents above consensus. For the second quarter our pro forma earnings were 6 cents under consensus. Part of the variability is driven by the fact that we don't provide quarterly guidance. However, if you look at it on a year to year basis, we are basically at consensus.

Although we experienced a decline in the second quarter 2003 results relative to last year, our year to date results are on our internal plan. In addition, the hot weather in the west and southwest during July should offset the impact of the unfavorable weather we experienced through June. We are reaffirming our prior 2002 pro forma earnings guidance range of $1.15 to $1.20. This pro forma earnings guidance represents on going operations and does not include the financial results of NRG, the tax benefits associated with our investment in NRG or the gain on the sale of Viking. In our earnings release we have also included a reconciliation of our pro forma guidance to GAAP earnings per share. Based on our guidance we expect to generate cash from operations of approximately $1.3 billion for Xcel Energy without NRG in 2003.

Our projected cash from operations does not include the positive impact from the tax benefits associated with the write off of our investment in NRG. After funding our projected 2003 capital expenditures of approximately $900 million and our annual dividend requirement of about $300 million, we expect to be able to generate approximately $100 million of positive cash flow in 2003. In the news release, we commented on th factors effecting our retained earnings level and the implications in our third quarter dividend. At the risk of being redundant I want to make our position clear. As we have previously disclosed a provision of the public utility company's holding act requires that retained earnings one component of shareholder's equity be a positive value as a condition to declare and pay a dividend. As a result of addition write downs at NRG, Xcel Energy's retained earnings balance was a negative $131 million as of June 30th, 2003. Going forward though we no longer have to book additional losses from NRG.

Our on going third quarter earnings are generally the strongest of the year and there is a potential to record up to $100 million of additional tax benefits relating to the basis of our investment in NRG. At this point in time, we believe that our retained earnings levels will be sufficient to pay the third quarter dividend based on the normal schedule without need of a waiver from the SEC. In addition, we have not yet booked a tax benefit associated with the $752 million proposed settlement reached with NRG and NRG's creditors. This is expected to provide an additional tax benefit of more than $260 million. This tax benefit will be recorded when it is highly probable from an accounting standpoint that the settlement will come to fruition.

If our retained earnings, however, are not sufficient to pay the dividend as normally scheduled we would request authorization from the SEC to pay our third quarter dividend out of capital and unearned surplus. In any event, we expect that our retained earnings would be sufficiently positive before the end of 2003 to pay dividends from retained earning at that time. We remain committed to paying a full 75 cent per share dividend this year. As you can see in note 4 to our earnings release the liquidity continues to improve. As of July 30th, 2003 we have total liquidity of approximately $960 million. Of this amount, approximately $425 million is in cash. This available liquidity is after paying the dividend for the first and second quarters. In June, we issued $195 million of 5-year bonds with a coupon of 3.4% at the holding company and used the proceeds to payoff a portion of the $400 million credit facility.

We now have over $600 million of liquidity at the holding company level. Our intention is to maintain strong liquidity and take advantage of our improved credit profile by refinancing some of the higher coupon debt. Although interest rates have risen in the last month, they are still very attractive and we expect that we can save about 250 basis points on $750 million on bond. This translates into approximately 15 to $20 million of annual savings. Finally, no conference call would be complete without an update on NRG. There has been a lot of focus on the issue relating to the contract between NRG and Connecticut Light and Power. As NRG has stated in various public statements, NRG loses a significant amount of money each day on the CLMP contract. However, our settlement with NRG and its creditors is not contingent upon any result with respect to the CLMP contract.

In addition it is our understanding that NRG can emerge from bankruptcy regardless of what occurs with that contract. I'll summarize the expected time line from NRG to emerge from bankruptcy. On July 24th, the bankruptcy judge approved filing NRG's disclosure statement with the SEC. The disclosure statement was filed as a u 1 with the SEC on July 28th. We requested the SEC act quickly on NRG's disclosure statement. We hope to receive approval by early September. Shortly thereafter, NRG would start the solicitation process and we would expect a completion of the solicitation in October of 2003. Finally, we would expect that at a confirmation hearing on NRG's plan of reorganization would be held in November.

Based on this schedule we would expect the effective date of NRG's plan of reorganization would be on or before December 15th, 2003. I want to clarify one question that has come up following the filing of u 1. In a settlement agreement, Xcel Energy has the option under certain circumstances to satisfy up to $200 million of the payment with common equity. One of the schedules in the u 1 shows a pro forma balance sheet with this funding. We have no intention or need to issue equity. The table was for illustrative purposes only. With that I will wrap things up.

As I look back over the past 12 months, it has been challenging and yet we are not quite done, but we have clearly turned the corner earlier this year. Through it all we haven't lost sight of our objectives and we continue to deliver on our commitments. Our two primary goals for this year are to complete the resolution of NRG and to deliver on going earnings in the range of $1.15 to $1.20 per share. With that we will open up the lines for questions.

At this time, I would like to remind everyone if you would like to ask a question press star then the number one on your telephone key pad. We'll pause for just a moment to compile the q and a roster. Our first question comes from Ali Argo from Bernum Securities.

Hi, Richard. When would you be in a position to determine what the status will be with regard to the third quarter dividend? Would that be close to the end of the quarter or when would the data be available?

I'm looking at to be able to make that decision probably sometime toward the end of August or early September.

Okay. And separately, in your press release, I think you talked about the fact that for the utility operations there were some higher purchased capacity payments that impacted you in the quarter as well. Could you elaborate on that, what those were and how much of an impact those were?

Yeah, we have added additional capacity of Public Service of Colorado of 417 megawatts net have been added this year. And there are two plants. That gave us a reserve margin of 13.3%.

Okay, but was that any cash flow -- out flow as a result of that?

We don't project the cash out flow on the specific contracts.

Okay. Thank you.

Your next question comes from Teresa Ho from Banc of America.

Yes, good morning. Could you tell us what your plans are with the positive free cash flow that you expect to come this year going forward especially if you do recognize the more than 260 million in tax benefits related to the settlement?

We started obviously making plans and preparations and there are several options we have available to us, but we probably won't finalize anything until we are confident that we are through the NRG situation. But at that time we will make sure that we have each one of the utility companies with the proper capital structure and that might mean injecting some equity down into the operating companies. And then after that we'll obviously look at paying down high coupon debt wherever we possibly can and then look at other options that would be available to us at that time including things like buying back stock, those sorts of things.

Would you look at the dividend?

Yes, we obviously would look at the dividend. I think that is one of the things that all utilities, and especially us, that our cash flow positive that we will look at the dividend and what the pay out ratio should be under the new Xcel Energy where we are strictly just utility companies and what is in the best interest of our investors which obviously a big part of that is the dividend.

Okay. And I guess maybe it is a bit premature, but in terms of a target payout, could you sort of provide us perhaps a range?

Well, right now our target has been in the 60 to 65%. We are at 62%. Once we get through NRG and we look at the risk profile of the entire company, it will probably be something in excess of that number but we are not far enough with any kind study to give you a specific range.

Okay. And lastly on the NRG time frame, I noticed that the time frame has been pushed back just a couple weeks, not too much. But should we read anything into that?

No. It is strictly a matter of getting through all these issues that we have to get through. There has been no slow down with anything. It is just a process that is a very complicated process. We are on track, we are on schedule and nothing has changed. We are feeling very comfortable about it.

Thank you very much.

Your next question comes from Michael Redinger from Satellite Asset Management.

Hi, good morning.

Good morning.

I just want to make sure that I understand the earnings per share calculation from the press release. For GAAP, since you reported a loss you were required to use the basic share count for fully diluted m basic?

That's correct.

And does that apply to continuing ops also? Are you able to use the diluted count for that?

It applies to everything.

Applies to both. And what's the difference in share count for fully diluted and basic?

It is 425 million.

Okay. All right. Thanks very much.

You're welcome.

At this time, I would like to remind everyone, in order to ask a question please press star, then the number one on your telephone key pad. And at company's request, if you can limit your question to one question per participant. Your next question comes from Elizabeth Parrella from Merrill Lynch.

Yes, thank you. Dick, at the beginning of the year I think you projected O&M expense would be up 2 1/2% including the impact of lower pension credits.

That's correct.

Year to date were up 3.8%. How do you feel about the target for the year at this point? How should we be thinking about O&M expense overall, and I guess specifically in the second half?

I think when we get to the whole year, Liz, we probably ought to be closer to the 3% range as opposed to the 2 1/2 which we originally assumed. I think 3% is about the right number.

Okay. And if I could just follow-up, specifically on the nuclear refueling, a couple of quick related questions.

Okay.

Tell us how much the refueling outage cost you on the O&M in the quarter, and when did Monticello come back and if you could just refresh for us what the timing is on the next Prairie Island refueling?

Cost us for the quarter are $10 million. Do you know when it came back -- when Monticello came back? We'll look that up in just a second and have that for you. And Prairie Island, we'll call you back on all those, Elizabeth.

Okay. Thank you.

Your next question comes from David Grumhoss with Copia Capital.

Good morning.

Good morning.

A couple quick questions following up on that, you mentioned the restricted stock awards, what was the effect of that on the O&M in the quarter.

It was $9 million.

And is that something that we will start seeing annually or was that more of a one time?

No that will be an annual -- there will be some charge on an annual basis.

And will it usually be in this quarter or is it likely to move around a bit?

No, it will be on a regular recurring basis once we get on a regular schedule.

Okay, great. In terms of the O&M, just legal expenses and dealing with NRG, are we likely to see some benefit from that once this all gets behind you, or is that pretty much being taken care of on the NRG side?

No it is -- unfortunately it is not all being taken care of on the NRG side. So, yes, there should be some benefit once we get this all behind us.

Any sense of quantifying that?

No, I don't have a real feel for what it is strictly on the Xcel side. But if you need that we can get back with you on that.

And there are no further questions, sir. Are there any closing remarks?.

No. If there are no further questions.

At that point I would like to thank everyone for participating in the call today. And after the call you can call me.

With that, thanks.

Thank you for participating in today's Xcel Energy second quarter 2003 earnings conference call. You may now disconnect.