埃克西爾能源 (XEL) 2003 Q4 法說會逐字稿

Good morning. I will be your conference facilitator. At this time, I'd like to welcome everyone to the Xcel Energy fourth quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star 1 on your telephone keypad. If you would like to can withdraw your question, press star 2 on your telephone keypad. Thank you, you may begin your conference.

Thank you and welcome to Xcel Energy's fourth quarter 2003 earnings release conference call. I'm Dick Kolkmann, managing Director of Investor Relations. With me today are Ben Fowke, Vice President, CFO and Treasurer of Xcel Energy and Dick Kelly, President and Chief Operating Officer of Xcel Energy. We also 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 will turn the call over to Ben Fowke.

Thanks, Dick.

I'm pleased to report that Xcel Energy reported earnings from continuing operations of $1.23 per share for 2003, compared with $1.37 per share in 2002. These numbers are presented on a GAAP basis.

During 2003, we divested or shut down several subsidiaries, which require the results of these subsidiaries to be treated as discontinued operations. Therefore, total earnings for 2003 were $1.50 per share compared with a loss of $5.77 per share for 2002. Included in discontinued operations for 2003 were net earnings of 27 cents per share, which included actions related to NRG and other subsidiaries. The NRG related impacts includes a gain of 96 cents per share associated with our investment in NRG and a loss of 60 cents a share to record our portion of NRG's losses during the year.

Additionally, in 2003, we took actions to streamline our focus and concentrated on our core utility business. We sold Viking Gas and Black Mountain Gas. We also decided to pursue the divestiture of our on investment in Argentina and to exit our natural gas trading business at E-Prime. As a result of these actions, we incurred a loss of 11 cents per share at Xcel International, which includes a writedown of our investment in Argentina, based upon our best estimate of the market value.

We also incurred a loss of 4 cents a share E-Prime, which includes a reserve based upon our discussions with the CFTC related to the reporting of natural gas transactions at E prime. We reported a gain of 5 cents a share for the sale of Viking Gas and a gain of 1 cent per share on the sale of Black Mountain Gas. As required by the accounting rules, we have also reclassified 2002 to consistently report the impact of discontinued operations. This will make our financial statements more comparable.

For the rest of this conference call, I'm going to focus on our earnings from continuing operations. As you develop your models and projections for 2004, I want to draw your attention to two one-time items included in our 2003 earnings from continuing operations of $1.23. During 2003, we resolved several tax issues related to prior years, which provided a tax benefit of approximately $36 million or 9 cents per share. Two key tax issues that were resolved included the tax deductibility of certain merger costs associated with the Xcel Energy and NCE merger and the state deductibility of transfer lease benefits. These benefits were partially offset by 3 cents of special charges, including our cost for legal and financial advisors to resolve the NRG situation and the write-off of our investment and Translink, an independent transmission company.

With this in mind, let's focus on the results from our utility operations. Our utility subsidiaries provided earnings of $1.35 per share for 2003 compared with $1.55 per share for 2002. This decrease of 20 cents per share is largely due to the following items. Dilution decreased earnings by 12 cents per share, weather decreased earnings by 6 cents per share. Higher O&M expenses decreased earnings by 14 cents per share and higher financing costs decreased earnings by 4 cents per share. These decreases were partially offset by tax benefits of 9 cents per share, which I previously discussed, higher short-term wholesale and trading margins, increasing earnings by 6 cents per share and lower depreciation expense, which increased by 2 cents a share.

Looking in more detail, our 2003 O&M expenses were higher by $96 million or 6.5%. This is largely due to higher benefit costs related to performance-based compensation, restricted stock grants, lower pension benefits and higher medical costs. Early in the year, we indicated that we expected our 2003 O&M expense to increase by 3%. I want to assure on you that we are managing our O&M expenses. Part of the increase reflects the design of our compensation plan. Our compensation plan is performance-based and depends on meeting corporate goals such as earnings, safety, planned availability, customer service and reliability. It covers all nonunion and a portion of our union employees.

In 2002, there was a minimal payout for some aspects of performance. In 2003, performance relative to goals was higher and therefore incentive compensation accruals were adjusted higher.

Also during 2003, we implemented a restricted stock program to strengthen the alignment of employee actions with shareholder interest. Criteria of the plan were met during the year, including achievement of a 27% total shareholder return, which required us to increase our accruals. We also took actions in the fourth quarter of 2003 to increase our spending to improve reliability in the Company's distribution system. Additionally, we wrote off certain inventory amounts in software costs. Overall, we expect that our 2004 O&M levels will be relatively flat compared with 2003 levels.

Shifting attention to the revenue side of the income statement, our short-term wholesale and trading margin was $43 million higher for 2003 due to favorable market conditions in the northern regions of our service territories. We normally don't spend much time talking about depreciation, however, our 2003 depreciation expense was $13 million lower than 2002 levels, largely due to two regulatory decisions. As part of the Colorado rate case that was settled in 2003, our depreciation accruals were lowered by approximately $20 million annually to reflect a lengthening of depreciable lives of certain utility plan. This change went into effect mid-year 2003 and was part of the reason for the rate decrease in Colorado.

During 2003, we were successful in getting legislation passed in Minnesota that granted additional storage of spent nuclear fuel at our Prairie Island Plant. We have enough storage to run the plant through the licensed light. In December, 2003, the Minnesota PUC approved extending the depreciation life of the two units of prairie island until 2013 and 2014. Previously, we assumed a depreciation life ending in 2007. We also changed the decommissioning accruals to reflect to a completely external decomissioned fund. The net effect decreased our depreciation accruals by approximately $22 million in 2003. These two regulatory adjustments more than offset the normal increases we typically see in depreciation expense.

One last item to discuss is our interest expense. Our financing costs were $30 million higher in 2003. We were very active in refinancing debt at lower rates during 2003. However, these actions could not entirely offset the full-year impact of the issuance of long and intermediate term debt in the latter half of 2002 to reduce the dependence on short-term debt. We do, however, expect that our financing costs will decline in 2004.

Now let's turn our attention to the nonregulated and holding company results. Our nonregulated subsidiaries and holding company costs resulted in a 12 cents per share loss for 2003 compared to an 18 cents per share loss for last year. The improvement is largely due to lower losses at Serin and financing costs at the holding company.

I will now want to turn our -- to the outlook for the year. For 2004, our earnings guidance remains in a range of $1.15 to $1.25 per share. We believe this guidance range is realistic and consistent with our expectations for 2004.

Let me discuss some of the key assumptions, drivers and sensitivities. We expect weather-adjusted retail sales growth of 2.2% for electric and 2.4% for gas in 2004. Our overall capacity charges are projected to increase by $40 million in 2004, primarily in Colorado. We filed a capacity right of request in Colorado to recover a portion of these costs. Based on the procedural schedules established by the Colorado commission, it is unlikely that this rate rider will go into effect before June 1 of this year. Our guidance assumes a June 1 effective date, which will increase revenues by approximately $20 million in 2004.

We are assuming that short-term wholesale and trading margins in 2004 are slightly less than 2003 levels to reflect more normal market conditions. As I mentioned previously, our 2004 O&M expenses are projected to be relatively flat compared with 2003 O&M expenses. We are projecting that our 2004 depreciation expense will increase by approximately 2% compared with 2003 levels. This change in depreciation assumptions at PSCo and for Prairie Island partially offsets the typical increases in appreciation expense.

Our interest expense in 2004 is projected to decline approximately $15 million compared with 2003 levels. Reflecting the full-year impact of our 2003 refinancing initiatives.

And finally, our guidance assumes that we continue to own and operate Serin. Serin has completed to build out of its operation and continues to add customers to its system. Based on this, our budget assumes a loss of 3 cents per share for Serin in 2004. Serin is now cash flow neutral and should not require any additional equity infusions from Xcel Energy. We expect Serin to continue to improve its operating results over time as they add customers and manage costs.

In summary, 2003 was a pivotal year for Xcel Energy. One of our most significant accomplishments was the resolution of the NRG situation. We reached a settlement with NRG creditors in the spring of last year and NRG emerged from bankruptcy in December. As part of the settlement, we no longer have any ownership stake in NRG. In addition as part of the settlement, Xcel Energy received voluntary and involuntary releases from NRG and its creditors. Our only open issue related to NRG is the settlement payment. We will pay $400 million at the end of February and $352 million at the end of April of 2004. We do not expect to tap the capital markets to make these payments.

As you can see from our earnings release, we currently have approximately $800 million of liquidity at the holding company. In addition, we expect to receive a $325 million tax refund in April that we will use to make the final payment.

2003 was a challenging year for our shareholders due to delays in dividend payments. With NRG's emergence from bankruptcy in 2003, we are current on all dividends and with a healthy level of retained earnings, we have returned to a normal dividend payment schedule. We plan to discuss our dividend policy with our Board of Directors in June of 2004 after the final payments to NRG have been made. Our long-term dividend policy will be based upon providing shareholders an appropriate return on their investment, our projected level of internal cash generation and the projected level of capital investment in our utility business. We will balance our dividend policy with the opportunity to invest in our core utility to maximize shareholder value.

In addition to resolving NRG, we have taken steps to improve our credit profile. During 2003, we issued over $1.6 billion of long-term debt at a blended interest rate of 4.6%. The proceeds were used to refinance higher coupon, long-term debt and trust preferred securities and to term out some short-term debt. These actions will reduce our interest expense and improve our credit metrics.

Another success last year was legislation passed in Minnesota that increased the amount of storage of spent nuclear fuel. This eliminated the overhang of a premature shut down of our Prairie Island nuclear plant much we will now continue to operate Prairie Island until the end of its licensed life in 2013 and 2014, providing the benefit of low cost nuclear generation to our customers in the upper midwest. We have also received approval for our Minnesota metro emissions reduction program, also known as MERP. The project will convert two coal plants to natural gas and install state-of-the-art emissions control equipment at a third coal plant. The project will cost about $1 billion and will be completed by 2009. The Minnesota commission also approved a rate rider that goes into effect in 2006 to recover the costs of the project.

We also took steps to streamline our focus during 2003. Not only did we sever our ties to NRG, but we also sold or are in the process of divesting Viking Gas, Black Mountain Gas, Xcel International and E-Prime. These are further proof of our plans to focus all of our efforts on our core utility operations. We also recently announced the sale of Cheyenne Light and Power. Cheyenne has been a solid company for a long time. We don't have a significant presence in Wyoming, therefore it made sense are for us to sell the property to Black Hills Corp.

Importantly, we achieved our earnings objectives for 2003. In the last year, we established a 2003 earnings target of $1.15 to $1.20. We never changed the objective during the year. Clearly we met our earnings objective for the year.

Finally, we've established a solid and realistic 2004 financial plan. We have provided you with all the -- of our key assumptions and we will focus our efforts in 2004 on achieving this plan. We are pursuing a strategy of investing in our core utility business. We are working with our respective commissions to ensure that we earn a reasonable return on that investment. This strategy will provide long-term earnings growth, which when combined with our dividend yield will provide an attractive total return for utility investors.

With that, we'll open up the line for questions.

At this time, I'd like to remind everyone, in order to ask a question, press star 1 on your telephone keypad. Due to the produced participants in today's conference, please limit yourself to one question. If you have a follow-up question, please press star 1 again to re-enter the queue. We will pause for just a moment to compile the Q&A roster.

Our first question comes from Paul Debbas of Value Line.

Hi. Could you please give us your capital spending plans? And whether that would necessitate any financing?

We don't have very many debt maturities in 2004. We're not planning on going out in the capital markets at this time in 2004. The overall capital expenditures are $1.2 billion in 2004, which we'll fund with internal cash. Thank you.

Your next question comes from [Ali Agha].

Thank you. As you're looking at your dividend in -- in your June meeting, could you also remind us what you think is the appropriate payout ratio for the utility with your characteristics?

Yeah, we -- we believe that the payout ratio ought to be in the 60 to 75% range.

Okay. And just one related question. Off your '04 base, given your characteristics, what kind of long-term growth rates should we expect from Xcel?

We think -- the -- typically we'll grow 2 to 3%, but we also have some opportunities with the MERP project and potentially the Colorado coal project that over a longer term time frame, the next decade, we think we can grow 3 to 4%.

Thank you.

Your next question comes from Peggy Jones.

Could you review the -- excuse me -- ongoing cash position at the parent level? I had worked out some numbers earlier based on your EEI presentation and it seemed to me that you might have somewhat over $200 million a year of free cash flow at the parent level for the next few years. And can you confirm how long the -- the tax loss carry forwards are expected to be in effect?

Okay, let me -- we're basically cash neutral after making our dividend payments. So, I'm not sure where the --

That's on a consolidated basis or at the parent?

That's on a consolidated basis.

Okay, and I'm asking a parent-level question. Sorry.

Well, I'm just trying to rough the numbers. That's about right, Peggy, if you -- if you look at the dividends up less the -- dividends up from our utilities operations less the dividends we pay to our shareholders, minus financing costs at the whole co that would be roughly in the ballpark, I believe.

The estimate of a little over $200 million a year?

Yeah. It -- perhaps a little bit less.

Okay.

Your second part of your question was related to -- I forgot now --

Yeah, um, how long are the --

Yeah, our finance -- finance forecast assumes a two-year NOL carryback. If that's the case, we will continue having carry-forwards through the '07 time frame.

Through '07?

Uh-huh.

Okay, great, thank you.

Next is a question from [Carrie Stevens].

Hi, I have a question and then a follow-up. I just want to be sure that I'm getting the correct impact of the D&A '03 to '04. Is there -- it looked like there was maybe a $10 million delta for Colorado but I was unsure if the rate reduction kind of muted that impact in the -- the decrease in D&A? If you could go over what we should expect?

For 2004?

Yeah. Is there another impact from the reduced D&A? The bottom --

no, the estimate of the 2% increase in depreciation next year embeds both those regulatory adjustments that I referred to.

Okay. So, is there any ongoing -- I'm trying to quantify the ongoing impact of it, aside from your 2% growth, what would the dollars be?

It's roughly $15 million increase in 2004, about what a 2% increase works out to.

Okay. I was asking specifically for Colorado but I will just follow-up offline. And I wondered if you could just give your operating cash flow number for 2003? And what your guidance is for '04?

About $1.3 billion.

In '03?

Yep.

And '04?

About the same.

Okay, thanks.

Your next question comes from [Ashar Kahn].

Good morning. Just wanted to check long-term strategy. Is there any other plans to sell any other assets, including nuclear assets?

There's no plans on the table. Obviously we -- we continue to look at our -- at our portfolio and as we did in -- we're showing -- with Cheyenne Light and Power, upgrading it where it's appropriate.

And can you just share with us what allowed -- what earned ROE was at the different subsidiaries if you have it?

We don't have it -- we don't break it out by each subsidiary, but overall in 2003 we earned about, on a consolidated basis, 10%. If you look at the operating utilities it was about 10.9%.

Okay. I appreciate it.

Your next question comes from Elizabeth Parrella.

Yes, thank you. Just looking in term of the assumptions you've made in your '04 guidance that you've provided us. Could you talk about what you see as potentially the greatest risk factors underlying those assumptions?

I think the thing we're probably going to watch the most closely, of course, is the capacity rider assumption in Colorado. Which we're assuming results in $20 million of revenue increases. Elizabeth, that's probably the one we're watching the closest. Obviously weather always plays a big impact with utility operations. All the other items are fairly much in our control. I guess the -- the other variable that is dependent upon market conditions is our assumptions around our wholesale margins and trading activities.

Okay. But you feel comfortable with being able to keep O&M flat --

Absolutely we do.

Okay. And if I could just ask a follow-up. Going back to your -- your earlier comments on the dividend review in June, and the follow-up question that was asked. I think in your initial comments you highlighted providing shareholders an attractive return but you also talked about cash flow relative to Cap Ex.

Uh-huh.

Is that a more important consideration than the level of earnings in the payout ratio? Going forward?

I think it's of equal consideration. We're going to balance the opportunity to grow our utility operations and grow it in the form of items like the MERP, rider with -- with our desire to have a -- a maximized shareholder return. So, I -- I would say they're equal, Elizabeth.

Okay. Thank you.

Again, if you would like to ask a question, please press star and then the number 1 on your telephone keypad.

Your next question comes from Daniele Seitz.

Good morning and could you review the assets that you intend to sell and also the time frame you think this is happening? And what impact do you anticipate it to have on earnings as well as the redeployment of this cash? Is it essentially to reduce debt? Or do you have on other plans?

Okay. I think you're probably referring to Xcel International. Which we assume -- we -- there should be no impact. We've -- we've -- we've wrote down the assets to reflect what we believe will be fair market value. Cheyenne Light and Power company, the cash that we received from that will just be added to general corporate -- just the general corporate funds. Those aren't -- that isn't -- is not a large transaction.

Right. And you were mentioning a couple of others in your presentation.

Well, we've -- we've -- we've -- we discontinued E-Prime, which should not have, again, we -- made the reserve reflecting our discussions with the CFTC so there shouldn't be any ongoing impact there as well. Not sure I can provide any more details than that.

Uh-huh. But this is not -- I mean do you visualize some acquisitions in the future of any kind? Or will -- or will all the cash be focused to the MERP provider as well as the Colorado expansion?

Yeah, we just -- we can't comment on the acquisitions but with the -- the -- again, these -- the items I mentioned, the cash associated with that will just go into our general corporate funds.

Also, I mean given the fact that you are serving like 11 states and a lot of states are -- do not have that much impact, do you anticipate that over the next five years there is some consideration that would take place?

Well, in -- in -- I will answer your question and then we probably need to move on, but we're in 11 states, not all of those states do we have significant presence in. So, you know, we -- we would continue as part are just running a good company to look for opportunities to optimize that. But there's no definitive plans.

Thanks.

Your next question comes from [Tom O'Neal].

Yes, I just wondered what specifically is embedded in your guidance for short-term wholesale and electric commodity trading?

We have not given a specific number. We think it will be somewhat less than where we finished 2003 as we look to more normal market conditions in 2004.

Okay, so, something more like 2002?

Just something -- 2002 was actually we thought a down market. So, just something less than 2003.

Okay. Thanks.

The next question comes from [Raymond Delane].

Hi, guys. A couple of questions. One, can you talk about the status of your bank lines? You had upcoming maturities and what you expect? And were they secured or unsecured? And can you talk about capital structure? What kind of targets and rate angles you have longer term? And an update on some of your coal hedging? Thanks.

I can't didn't hear the last part of your question.

Coal hedging for '04 and '05.

Let me start with that one. I think coal -- we've purchased coal through -- throughout -- through this year. As far as -- what was the next question?

Next year, I think. Short-term bank loan.

Oh, I'm sorry, the bank lines are all 364s. The first is the SPS credit facility that -- that we're in the process of extending. But that's going very well.

The other two facilities are PSCo and NSP. Those are the two lines that were secured last year. They come up in May. There's no reason to see any difficulties down there that we have a lot of -- no reason to see any difficulties down there that we have a lot of opportunities. And we will roll them at the same levels that we did in 2003.

Did I catch all of your questions?

Yeah. Yeah. And can you talk about cap structure targets and rating goals? And what -- PSCo and NSP would be secured or unsecured?

We expect they would not be.

Okay. Thanks.

The overall ratings targets, we like to see the operating utilities in the -- in the A-minus type range. We -- we have a target of BBB-plus for the holding company. You -- the press release disclosed our cap structure. We have a 43% equity to debt ratio. Over time that improves a bit and we're working with the rating agencies just to make sure those are the right -- those were in line -- our metrics were in line with what their needs would be to achieve our credit goals.

Your next question comes from [inaudible].

Yes. Just -- did you say -- what's the target debt to total cap ratio? 43%?

The equity is 43%. We have 1% of preferred and 56% debt.

Yeah. What's your -- is that the level you feel comfortable? Or you would have a different targets level?

Oh. That's roughly within the range that we think warrants the credit metrics that we referred to.

Okay. Can you give me an estimate of the Capex in 2004?

Capital expenditure in 2004?

Yeah.

About $1.2 billion.

And how much dividend do you expect to take out from operating companies --

Well, as mentioned, we will review our dividend policy with the board of directors in June of this year.

I mean the dividend you can take out from the operating company, the holding company.

We have an internal dividend policy with the operating utilities and the dividends go up to the holding company to support the dividend payment to the shareholders. We then periodically look to put equity from the holding company back into operating utilities, again based upon our credit metrics.

Okay. Thank you.

Our next question comes from Paul Patterson.

Hi, how are you?

Good.

A lot of my questions have been answered, but just one sort of kind of minor one, really. With Serin... Does it really fit with the long-term strategies of the company? I mean what are your thoughts of discontinuing that?

Well, I mean it's -- would we make -- would we invest in another Serin today? I think the answer to that is no. But Serin is -- has completed its build-out. It's cash flow neutral going forward. Its earnings will continue to improve. We think we can manage the costs. We will continue to hold it.

When do you think it will be earnings positive?

About 2008.

2008? Okay. Okay. Thanks a lot, guys.

Your next question comes from Paul Rizdon.

You talked about two items. A $36 million tax benefit and then 3 cents of special charges. Those are included in your ongoing earnings?

Yes.

What -- what periods were those recognized in?

They were recognized -- the majority -- well, they're recognized in 2003. The majority of the tax benefits were recognized in the fourth quarter of this year.

And then the legal and -- and Translink?

That's been throughout the year. Translink we wrote off, I believe, in the fourth quarter.

Okay, thank you very much.

You're welcome.

Your next question comes from Peggy Jones.

Yes, my question was when do you think the agencies may upgrade you?

You know, that's a tough one to say. I mean we -- we -- we had an open dialogue all last year when we were working through the NRG situation. We continue to have good, open dialogue with the rating agencies. It's, you know, we like to think we're positioned well but it's just a matter of time, Peggy. It's their call. But I can't speculate on that.

Okay. Thank you.

Your next question comes from [Carol Choy].

Hi. It's actually Karen Choy. I had a quick question on the parent company -- can you give us the details on that?

I'm sorry, your question faded out. What?

Can you give us the details about the parent -- the hold Co. level cash flows? I know you really didn't give out a number, but can you tell us what 2003 dividends were from those to the parent?

2003 dividends? You're fading, I'm sorry, you're fading -- you're fading in and out.

What were the dividends from the operating utilities to the parent company in 2003?

Oh. It's roughly about $600 million up and we -- we have a -- the public dividend payout is about $300 million in 2003.

And then there's interest costs.

Then there's interest cost and then there's like I mentioned before, if -- we also have a tax benefit, as well associated with the worthless stock deduction we took for NRG and as I mentioned, we periodically send cash back down in the form of equity infusions to the operating companies to keep them with solid credit metrics.

Are there any plans to put equity in the utilities this year, in 2004?

Yeah, in keeping with those metric objectives.

Okay. But there is still a level of -- Peggy's question earlier asked about possibly $200 million in excess cash at the parent company level. And you're saying that could be there, but you could use it to put in more equity at the utilities?

Yeah, I mean, again, we look at this thing on a consolidated basis.

Okay.

And on a consolidated basis, we're about cash flow neutral.

Okay.

In 2004.

And just on my numbers, I thought -- there seemed to be quite a bit of cash that could go up to the parent level and I didn't know what the plans were for the excess cash as a parent because you do get the tax benefits at the parent level also, right?

Yeah but I think you're -- yeah, the point is that --

It will be used throughout the system anyway.

Exactly.

Okay. Okay. Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Kolkmann, are there any closing remarks?

No -- do you have any?

I want to thank everyone for participating in the call. If you have any other questions, feel free to give Dick Kolkmann or Paul Johnson in our Investor Relations group a call. Thank you, everyone.

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