埃克西爾能源 (XEL) 2003 Q3 法說會逐字稿

Good morning. My name is Jessica, and I will be your conference facilitator today. At this time I'd like to welcome everyone to the Xcel Energy third quarter 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 and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key and the number two on your keypad. Thank you, Mr. Kolkmann. You may begin your conference.

Thank you, Jessica, and welcome to Xcel Energy's third quarter 2003 earnings release conference call. I'm Dick Kolkmann, Manager Director of Investor Relations. With me today is Dick Kelly, President and Chief Operating Officer of Xcel Energy, Ben Fowke, Vice President and Chief Financial Officer and Treasurer of Xcel Energy. In addition, we have several others here to help 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 Energy filings with the Securities and Exchange Commission. Now I'll turn the call over to Dick Kelly.

Thank you, Dick. What I plan to do today is discuss our earnings for the quarter, brief you on our expectations for NRG's bankruptcy schedule, discuss our annual earnings Guidance for both 2003 and 2004 and provide you an update on our Dividend situation. For the third quarter of 2003, Xcel Energy recorded earnings of $.69 per share on a GAAP basis compared with a loss of $5.55 per share in 2002. Our GAAP earnings for third quarter of 2003 include $.25 per share to record additional tax benefits associated with our investment in NRG.

Last year, as you probably recall, we incurred some significant losses due to write downs at NRG for Asset impairments. Excluding the impact of NRG, Xcel Energy's earnings from continuing operations were $.44 per share for the third quarter of 2003 compared with the same number of $.44 per share for 2002. Our utilities subsidiaries provided earnings of $.45 per share for the quarter, compared with $.49 per share last year. The decrease of $.04 per share is largely due to the following items, higher O&M expenses decreased earnings by $.05 and dilution decreased earnings by $.02 a share. These decreases were partially offset by increased short-term wholesale and trading margins which increased earnings by $.03 per share. Weather for the quarter was warmer than normal for both 2003 and 2002, and therefore had no impact on the quarterly comparison. Our O&M expenses were higher by $33 million for the quarter, largely due to higher benefits costs relating to restricted stock grants, incentive compensation, lower pension benefits and higher medical costs.

During our second quarter earnings conference call I indicated that we expect our annual O&M expenses to increase by about 3 percent over 2002 level. This is still a reasonable projection. Our forecast also incorporates our incremental spending to improve the reliability in our service territory. We think this is a good long-term business decision. Our short-term wholesale and trading margin is $23 million higher for the quarter due to favorable market conditions. In addition, lower water levels in Canada allowed us to sell additional energy and capacity to Manitoba Hydro. Our other nonregulated subsidiaries and holding company cost resulted in a $.01 per share loss for the third quarter compared with a $.05 per share loss for last year. This is due to a $.03 per share improvement at Xcel International largely due to a loss of $.02 cents per share in 2002 on the sale of our remaining interest in Yorkshire Electricity.

In addition, during the third quarter of 2003, we recorded a gain of $.02 per share from the sale of water rights at our utility engineering subsidiary. As we discussed in our earnings release, our third quarter earnings exclude NRG's results for the quarter. I can't tell you how nice it is to be able to finally say that. As a result of our recording our share of NRG losses for the second quarter, Xcel's negative investment in NRG is now at a level that exceeds our proposed settlement with NRG and its creditors. Based on equity accounting rules, this serves as a cap. In other words, assuming the settlement agreement and the bankruptcy proceeding progresses as expected, we do not anticipate recording further losses from NRG. Therefore we did not record any impact of NRG's quarterly results for the third quarter of 2003 on our financial statements.

While we're on the NRG topic, let me give you a quick update on the NRG bankruptcy schedule. NRG has made great progress in the last few weeks. In early October we received approval from the [inaudible] to transfer the NRG Assets to the creditors and SEC approval of NRG's Plan of Reorganization and Disclosure Statement. Last week NRG sent out the solicitation for the Reorganization Plan to the creditors. The solicitation process is scheduled to be completed on November 12th. The bankruptcy judge has scheduled a confirmation hearing for November 21st and November 24th. After the confirmation hearing there's a ten-day appeals process. After the appeals process has expired the judge will be in a position to confirm NRG's emergence from bankruptcy. Based on this schedule, we expect the effective date of NRG's Plan of Reorganization will be early December. Early in the year we announced our 2003 financing plan to reduce our interest cost and improve our credit metrics. During the third quarter we completed our financing plan.

In total we issued over $1.6 billion dollars of long-term debt at a blended interest rate of 4.6 percent. The proceeds were used to refinance higher coupon long-term debt and toppers and to term out some short-term debt. These actions will reduce our interest expense by more than $20 million dollars on an annual basis. Now I want to turn to our outlook for this year. We manage operations on an annual basis. We also manage our business based on the entire Income Statement.

Earlier in the year when it became clear that our short-term wholesale and trading margins were going to be higher than we originally anticipated we decided to invest additional O&M dollars in both our generation and delivery dollars. We are managing the business to maximize the long-term benefit of share holders and customers. Our Year to Date results are on our internal plan. We are reaffirming our prior 2003 pro forma earnings guidance range of $1.15 to $1.20 per share. This pro forma earnings guidance represents ongoing operations and does not include the financial results of NRG or the tax benefits associated with our investment in NRG or the gain on the sale of Viking. In our earnings release we've also included reconciliations of our pro forma guidance to GAAP Earnings per Share. We're still in the process of finalizing our 2004 budget.

However, we're far enough along to provide 2004 guidance. For 2004, our earnings guidance is a range of $1.15 to $1.25 per share. This guidance is realistic and consistent with our expectations of 2 to 3 percent long-term earnings growth. Let me discuss some of the key assumption drivers and sensitivities. We expect weather adjusted sales retail growth of 2.2 percent for electric and 2.4 percent for gas.

We have assumed a successful recovery of capacity costs in our Colorado Capacity Right of Filing. Our filing in Colorado seeks to recover almost $30 million of additional revenue in 2004. Overall in the Xcel Energy system, capacity charges are projected to increase by $40 million in 2004 primarily in Colorado. Therefore, we need successful recovery of a portion of these costs to achieve our guidance. We're assuming that short-term wholesale and trading margins in 2004 are approximately equivalent to 2003 levels.

Our 2004 O&M expenses are projected to increase 2 to 3 percent over our projected 2003 O&M expenses. We continue to manage our expenses judiciously. However, following national trends, we're experiencing declining pension credits and rising medical costs. Our Interest Expense in 2004 is projected to decline approximately $15 million compared with 2003 projected levels. This reduction reflects the full year impact of our 2003 refinancing initiatives. The Savings and Interest expense will be offset by increases in Depreciation expense and property taxes. Finally, our base level assumption is that we continue to own and operate [inaudible] with no change in the investment on the Balance Sheet. Based on this, our budget assumes a loss of 3 to $.04 per share for Serin in 2004. However, we continue to evaluate the strategic fit of Serin in the Xcel Energy portfolio.

If there's an opportunity to take action to reduce the level of losses at Serin, we'll certainly assess what is in the best interest of our shareholders. Our guidance range incorporates potential actions to reduce the loss. As we previously disclosed, a provision of the Public Utility Company Holding Act requires that retained earnings be positive as a condition to declare and pay a Dividend. As a result of writedowns at NRG, Xcel Energy's Retained Earnings balance was a positive $43 million at September 30th, 2003.

Although our retained earnings are positive, it is not sufficient to declare and pay the third quarter Dividend, which is approximately $75 million dollars a quarter. We do have sufficient retained earnings to declare and pay our preferred Dividend, which we declared yesterday. We have requested authorization from the SEC to pay our third quarter Dividend out of Capital Surplus, however we have not yet received that authorization.

In any event, we expect that our retained earnings will be sufficiently positive before the end of 2003 to pay Dividends from retained earnings at that time. We expect we will record at least $100 million of Net Income during the fourth quarter. We also expect to book the tax benefit associated with the $752 million proposed settlement reached with NRG and NRG's creditors prior to year end. 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.

Therefore we anticipate that we will be in a position to declare and pay the third quarter Dividend in December. After that, we expect to be on a normal Dividend declaration and payment schedule. Lately we've been getting a lot of questions about what we intend to do with our Dividend in the future. Before we address our long-term Dividend Policy, we need to completely resolve the NRG situation.

By resolution, I mean that NRG is out of bankruptcy and that we've made our final payments relating to the settlement agreement. That final payment is projected to occur in April of 2004. Therefore I anticipate that we will discuss our Dividend Policy with our Board of Directors in June of 2004. Our long-term Dividend Policy will be based on providing shareholders an appropriate return on their investment as well as our projected level internal cash generation and looking at the projected level of Capital Investment in our Utility business. I think that an appropriate payout ratio for a low-risk utility with minimal nonregulated investment is somewhere in the 60 to 75 percent range. That being said, we are also looking at our generation needs in both Minnesota and Colorado. There clearly is opportunity for us to make incremental investment in our Utility Assets, assuming that we can get appropriate recovery of our costs. We will balance our Dividend Policy with the opportunity to invest in our [inaudible] utility in order to maximize shareholder value.

As some of you may have seen, I'm moving to a new role as President and Chief Operating Officer for Xcel Energy. Reporting to me will be the Energy Supply and the Delivery and Field Service Area, among others. My focus will be on generating and delivering energy, satisfying our customers, and protecting the environment. This will allow Wayne Brunetti to focus on Xcel Energy's overall management, direction, and strategies.

Ben Fowke, our new CFO and various other [inaudible] functions will report to Wayne. With the NRG situation nearing its final resolution, this was an opportune time to make the change. I have sincerely enjoyed the time I have spent meeting with many of you over the past years or so. I expect to continue to be involved with investor [inaudible] in the future, but with more of an operational focus. And I'm also pleased to announce that Ben Fowke is our new Vice President, CFO, and Treasurer. Previously Ben was our Treasurer and was responsible for the financial operation of our commodities trading and marketing business units. I've had the pleasure of working with Ben for many years and have tremendous respect for his skill and expertise. I know that he will do an excellent job as CFO.

Ben will be at the EEI financial meeting in Orlando with us next week. Those of you that are in attendance will have the opportunity to meet Ben. With that I'll wrap things up. I feel very good about the position of Xcel Energy at this point in time. We have made significant progress on NRG and are poised to see NRG emergence from bankruptcy in December. With NRG’s emergence from bankruptcy we expect to declare our third quarter Dividend and get our Dividend back on a normal payment schedule.

We have completed our 2003 financing plan which will reduce our Interest Expense and improve our credit metrics. We're in a position to improve our credit ratings. We have had nine solid months of results and are on track to achieve our earnings guidance. Finally, we have established a solid base for our 2004 financial plan. With that we'll open up the lines for questions.

At this time I would like to remind everyone if you would like to ask a question, please press star and the number one on your telephone keypad. We will be taking questions from analysts and request that you limit one question per line. If you have a follow-up question, press star one again. If your question has been answered, press star two to remove your question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Elizabeth Parrella [phonetic] with Merrill Lynch.

Thank you. Regarding the Colorado capacity payments, could you talk a little bit about that 30-odd million dollar figure? When would you expect to start incurring that, as sort of a calendar 2004 increment. And, you know, prior to the Commission making some decisions, how are you treating that for accounting purposes?

The $30 million, Elizabeth is the incremental cost that we hope to recover starting in March of 2004. The actual increase in capacity cost for the year 2004 is $40 million. We record that as it is incurred on an accounting basis.

So you're expensing it as it's being incurred?

That's correct.

Okay. And the -- you're hoping the Commission would make a decision by March?

That's correct.

And just a follow-up on that, on the ROE indicated you were proposing as part of this filing that you would share 100 percent of earnings in excess of the allowed ROE with customers as part of this. That seems like it's a change from the performance-based rate making plan where you would have had kind of a sharing mechanism, rather than giving 100 percent back to customers in '04.

That's correct. We did have the sharing mechanism, sharing anything over that with the customers. We will not have that mechanism in '04 if this goes through as we requested it.

That proposal is just for '04 to give 100 percent back.

It's until we have the next rate case.

Thank you.

Your next question comes from Michael Gordonberg with Luminous Management.

Good morning, guys.

Good morning.

I just wanted to ask you, just wanted to clear up on the Dividend and the whole plan of reorganization. Is this still anything that can hold up this process, or at this point are you in the clear?

Until we get the final order from the bankruptcy judge and go through the ten days after that for the appeal process, there's always something that can slow it down. We are very optimistic that we think we have everything under control. We see very little opportunity for anything to happen. But There always can be something that happens.

But there is really no reason to start a plan B or anything like that?

That's correct.

I also wanted to ask, I see O&M is creeping up for reasons that are plaguing the rest of the industry, such as pension and healthcare, but a fair amount of companies have started looking at trimming labor costs and other ways of keeping O&M down. Are you looking into that?

We're always looking at ways to improve the way we operate the company. We've been fairly aggressive in years past to reduce O&M, so there's not lot of new programs that we can point to now. But We'll continue to look at ways to continually improve our financial situation.

And I guess my final question -- I guess one quick question. Do you absolutely have to make the hundred million in Q4 '03 to be able to pay the Dividend?

No. As I said, Depending on if we get out of the NRG bankruptcy like we're on schedule to do so, we'll have more than adequate retained earnings to pay the Dividends.

Just final question, maybe can you discuss the potential affect on FUCA, if you see any for you?

I don't see any huge impact on us if FUCA is repealed, I assume is what you’re referring to.

Right, FUCA repeal, I’m sorry.

It will make some of the reporting requirements easier and those kinds of things, but I don't see any major impact on us.

Nothing, acquisition-wise?

No, I don't. I don't see that.

Thank you very much.

Okay.

Your next question comes from Emma Atta from Burhman [phonetic].

It's Ali Agha. First, what is the effective tax rate that you assume to get to the operating numbers?

31 percent.

31 percent. And second question, going back to your concept about the correct Dividend payout ratio and what have you, what is your optimal debt to cap target for the company? And I didn't think I saw the balance sheet -- where are you today relative to that?

When you get to the optimum captial structure, I think we've talked about it in the past that we'd like to be rated somewhere between a triple B and a triple B+ at the holding company and maybe an A minus-range for the utilities. We'll push to get the capital structure in the range that would let us get those kind of credit ratings.

What kind of timeframe would you have to get there?

I think we'd like to do that as quick as we can. We'll make some major progress in '04.

Okay. Okay. And then final question, with regards to the Colorado process that you were referring to earlier, is that a process fairly straightforward? Or What are you sort of near-term milestones between now and March to keep an eye on to see the progress?

It's a fairly straightforward process where we're going to have to have some kind of hearings and approval by the Commission. There will be some dates that we will announce when those things happen.

So it hasn't -- you haven't made your initial filing yet?

We have made the initial filing, yes, but we'll have to have some kind of hearings before they become effective.

I see. Thank you.

Your next question is from Charles Fishman with A. G. Edwards.

Good morning. Could I ask you to speculate on why the SEC didn't grant a waiver this time around on the Dividend?

It's pretty hard to speculate, Charles, as you know. We filed it with them. They have got a lot to do -- they have gone through a lot of issues. A lot of them revolve around Xcel. I think it's just a matter of them not having the time yet to get to it.

So it was a matter of their workload rather than anything that changed in your request.

Absolutely Nothing changed in our request. It was more their workload.

Thank you.

Your next question is from Greg Schultz, SAB Capital.

Good morning.

Good morning.

Let's see. A couple questions. Have you -- right now they are soliciting votes in the reorg?

Right.

Can you share —has anything come in?

We have not received any kind of reports yet from the soliciters. So I don't have any information.

No Like exit polls or anything.

No. Good point, though. Maybe I ought to look into that.

That would be nice. Are you aware of any objections though?

No.

The odds of somebody sort of coming up eleventh-hour are slim.

We don't know of anybody, so I see it as very slim.

Your guidance for this year, that's on the fully diluted, right, the 420?

Yes, That's correct.

And are there -- give me an idea of how much you spent on legal costs that you're sort of running through your parent P&L that might go away next year?

So far this year it's been $12 million.

Okay . Awesome.

Thank you.

Thank you.

Your final question is from Elizabeth Parrella, Merrill Lynch.

Thank you. I guess two questions. Your comment on O&M expense for the year being up 3 percent, that I guess would imply very good performance in the fourth quarter. I think in last year's fourth quarter you had some unusual expenses. Is that the driver behind that?

The real driver is '02's expenses were very high. And '03's will be closer to normal. So that's how we get there.

Okay. Sort of a decline year-over-year on O&M expense in the fourth quarter.

That's correct.

Secondly on the better short-term wholesale and trading margins.

Right.

I think for the year is running above what you had figured. Since in '04 you're indicating it should be kind of flat with '03. Could you give us a refresher on what you think now it will be for '03?

I don't have the exact numbers, Elizabeth. But I think, yes, it's consistent with where we've been for the current nine months.

Some of these favorable trends that you mentioned, have you seen those sort of continue into the fourth quarter?

Yes. You're talking about Manitoba Hydro and those? Yes, we have seen that.

Your next question is from Tom O'Neal from Lehman Brothers.

Good morning.

Hi, Tom.

Just a quick question on the capacity cost increases. Is there anything incremental that starts to creep in in 2005 either in Colorado or Minnesota?

I think it will continue to go up juts as we continue to have increased purchases. That's far enough out, that we don't have any specific numbers on that.

Okay. Thanks.

Your next question is from Paul Debbas [phonetic] [inaudible].

You mentioned that you expect interest expense to be $15 million lower next year.

That's correct.

What do you expect that to wind up in '03?

How much lower will it be in '03?

What's the actual total in '03?

I guess you can take -- the first three-quarters are done, there won't be any more financings than estimated. We don't have that number right now, Paul.

All right.

You have a follow-up question from Greg Schultz, SAB Capital.

Hi, guys. Yeah, a quick follow-up on NRG and when you might pay the Dividend for Q3. If – the minute it's probable you can book that 260?

That's correct.

So that will sort of put you over the threshold to pay out the 75?

Right.

Does that happen when you get the votes? Does that happen when it's confirmed? What did the accounts tell you – (multiple speakers)

We're in deep discussion with the accountants now. I think definitely when it's confirmed there's no question about it.

Sure.

If we get a high enough vote, I think that might be a good indication then, also. As we get to that point we'll have very serious discussions with them.

So If you get -- let's say it happens on the 12th, you count the votes and you get an overwhelming number, are you in a position on the 13th where you would sort of just declare it and pay it potentially?

We have to wait to get the list certified. We just can't look – it might take another four or five days. So we'll be getting closer to the 21st or so before we do that.

Gotcha.

Okay.

At this time there are no further questions.

All right. At that point, then, I would like to close our third quarter earnings conference call and thank you all for participating. For any follow-up questions later in the day, Paul Johnson and I will be available to answer your questions. Thank you.

This concludes today's conference call. You may now disconnect.