埃克西爾能源 (XEL) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Paul, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Xcel Energy first quarter 2005 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. [OPERATOR INSTRUCTIONS]. In order to ensure that all participants will be allowed to present their questions, we ask that each participant limit themselves to one question. If you have any follow-up questions please reenter the queue. I would now like to turn our conference over to our host, Mr. Richard Kolkmann, Managing Director, Investor Relations. Thank you, Mr. Kolkmann. You may begin, sir.

Thanks, Paul, and welcome to Xcel Energy's first quarter 2005 earnings release conference call.

With me today is Ben Fowke, the Vice President and CFO 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'll turn the call over to Ben Fowke.

Thanks, Dick, and welcome, everyone.

Xcel Energy recorded earnings from continuing operations of $0.30 per share for the first quarter of 2005, compared with $0.36 per share for the first quarter of 2004. Total earnings for the first quarter of 2005 were $0.29 per share, compared with $0.36 per share for 2004. Our results from discontinued operations for the first quarter of 2005 reflect a loss of $0.01 per share, which includes the results of Seren and Utility Engineering. Our utility subsidiaries provided earnings of $0.32 per share for the first quarter of 2005, compared with $0.37 per share for the first quarter of 2004. This decrease of $0.05 per share is largely due to the following items -- Lower short term wholesale and trading margins, which decreased earnings by $0.04 per share; higher depreciation expense, which decreased earnings by $0.03 per share; and higher utility O&M expenses, which decreased earnings by $0.01 per share. These negative variations were partially offset by increases in electric utility margins, which increased earnings by $0.01 per share; a lower effective tax rate, which increased earnings by $0.01 per share; and several other items, which rounded together to $0.01 per share.

Our holding company costs and other nonregulated subsidiaries incurred a loss of $0.02 per share for the first quarter of 2005, compared with a loss of $0.01 per share for last year. The $0.02 per share loss is largely due to interest expense on debt issued at the parent level and preferred dividends for both periods. In the first quarter 2004, our nonregulated subsidiaries contributed earnings that rounded to $0.01 per share. Eloigne and Quixx are the only remaining nonregulated subsidiaries included in our continuing operations, and these companies didn't have a material impact on our financial results for the quarter.

To summarize, our first quarter results are a bit lower than our plan, but are generally in line with our expectations. Going into the year, we expected that our earnings would decline for the first quarter. We anticipated our short-term margins would decline. In addition we expected depreciation and O&M expenses to increase as we continue to execute the build the core strategy.

I think it'd be helpful at this time to look into the details of our quarter. Starting at the top of the income statement, our base electric utility margins increased by $10 million for the quarter. There are a couple items I'd like to point out. First and probably the most significant item is sales growth. For the quarter, weather-adjusted retail electric sales grew at 0.5%, which reflects the impact of a leap year in 2004. Weather-adjusted retail electric sales growth would have been approximately 1.5% after adjusting for the leap year by removing the extra day of sales in the first quarter of 2004. However, even with this adjustment, our sales growth is lower than we anticipated. We have adjusted our projected retail electric sales growth downward from our original assumption of 2 to 2.4%, to 1.6 to 2% to reflect first quarter results. We will closely monitor this trend as the year continues.

As most of you know, our winter temperatures were very mild. Temperatures in Minnesota, Colorado, and Texas were all warmer than normal. As a result of the warmer than normal winter seasons, our retail electric margin was $3 million lower for 2005 compared with 2004. There are several other variances which are described in the electric margin table of the earnings release.

Moving to short-term wholesale margins, as expected, our first quarter 2005 short-term wholesale margins declined by $26 million. As we have discussed in the past, we benefited from a significant contract at NSP Minnesota, which provided $17 million of margin during the first quarter of 2004, which we did not expect to be replicated in 2005. In addition, there was less market activity around the NSP systems as market participants prepared for commencement of MISO Day 2 operations. We also saw less market demand as Canadian water conditions normalized in 2005. And finally, increased retail load requirements combined with lower plant availability reduced surplus generation available to sell on the wholesale market. Overall the short-term margins for the first quarter of 2005 were in line with our plan and consistent with our full year expectations.

Turning to O&M, our first quarter 2005 O&M expenses were higher by $9 million or 2.2%. The increase in O&M expenses were driven by higher pension and medical expenses and a planned nuclear outage at our Monticello plant. These increases were partially offset by lower incentive compensation expense and lower expenses at our fossil plants. Overall our first quarter O&M expenses are consistent with our annual guidance. Depreciation expense for the first quarter of 2005 was $22 million higher than 2004 levels. The increase is due to normal growth in rate base and incremental depreciation for several large projects including the new steam generator at Prairie Island and a new billing system. We expect to receive recovery of these investments in future rate filings. Our depreciation expense for the first quarter was consistent with our expectations, and there is no change in our annual guidance.

That covers our earnings for the quarter. Next I'd like to discuss a few near-term accomplishments and initiatives. As you probably know, we have been taking proactive steps to enhance the liquidity in our system. Last week we renewed our credit facilities at our operating companies. We now have individual five-year unsecured credit facilities at NSP Minnesota, PSCo and SPS. The total size of the facilities is just over $1.1 billion. All of our facilities are now five years in tenure, and all have very favorable terms and conditions.

We continuously evaluate our business portfolio. It's part of our strategy of focusing on the core utility operations. Over the past few years, we have been very successful in divesting our noncore assets. In April 2005, we made further progress when we sold Utility Engineering. Our next initiative is the sale of Seren, our telecommunications subsidiary. In 2004 when we made the decision to sell Seren, we recorded an estimated after-tax impairment charge of $143 million. Based on our estimate, the sale of Seren would provide us with cash proceeds of approximately $65 [ph] million at closing. In addition we would have an NOL tax benefit of approximately $85 million that will be realized over time. We will use these funds to reinvest in our utility business. Once a sales agreement is reached, we will need to transfer Seren's franchises and telephone services authority. Based on this process, which will take several months, we expect to complete the sale of Seren in the fall of 2005.

When we issued our 2005 guidance last fall, we described 2005 as a transitional year. We have started to implement our strategy of increasing our investment in our core business. As a result, we are seeing the impact of increased depreciation expense, but we don't have any additional revenue recovery in 2005 above normal sales growth to offset the costs associated with those investments and other expense increases. As I mentioned earlier, we have made some modifications to our guidance assumptions to reflect the first quarter results. However, our 2005 guidance range for earnings from continuing operations remains at $1.18 to $1.28 per share. This year, we are implementing our regulatory strategy to seek revenue increases to close the earnings gap in jurisdictions where we are not earning our authorized return and also to recover a return on our incremental investment. We don't expect any material rate increase in 2005. However, we are taking actions that we expect to deliver results in 2006 and beyond.

In Minnesota, we recently filed a settlement agreement we reached with the Department of Commerce as part of our Minnesota natural gas case. The settlement agreement includes an annual rate increase of $5.8 million, based upon a return of equity of 10.4%. The settlement also reflects an increase in the monthly customer charge from $6.50 to $8.00. This change will provide us with more protection against declining use per customer. We expect a final commission decision later this summer. Although the return on equity was lower than we requested, it reflects the low tide for interest rates based upon our filing date. It's been a long time since we filed a general rate increase in Minnesota. The filing process went smoothly, and there were not any significant issues raised related to our cost structure or rate base. We think the results reflect constructive regulation.

At SPS we reached a settlement agreement with several of the interveners on the fuel reconciliation issue. The settlement of $25 million is consistent with the amount we reserved in the fourth quarter of 2004; and as a result, we don't expect to have to approve any additional refunds related to this issue. We expect a final decision from the Texas Commission later in the year.

In 2005, we are initiating several rate cases as part of our regulatory strategy. In May, we plan to file a natural gas rate case in Colorado. In June, we plan to file an electric and natural gas rate case in Wisconsin; and in the fourth quarter, we plan to file electric rate cases in Minnesota, North Dakota, and South Dakota. Although it's a little too early to talk about the size of these cases individually, we expect that in total these rate filings will contribute significant earnings in 2006.

So with that I will wrap things up. Overall it was a solid quarter. Our operations continue to run smoothly; and with the exception of lower sales growth and warmer temperatures, our quarterly results are generally consistent with our financial plan. We are pursuing our strategy of investing in our core utility business. We kicked off our Minnesota Emissions Reduction project with a ground breaking ceremony at our King plant last Friday. We're working with our respective commissions to ensure we earn a reasonable return on our investment, and we're on track to file several rate cases in the next several months.

With that, let's open the lines for questions.

[OPERATOR INSTRUCTIONS]. Ali Agha, Wells Fargo Securities.

Thank you. Good morning.

Hi, Ali.

Ben, as I look at the series of assumptions you laid out for your '05 guidance, specifically the assumptions as it relates to the Minnesota gas rate case settlement and the FERC rate case, could you just remind us, what's the -- could you quantify the impact of those two rate cases in '05?

They are within the guidance range of $1.18 to $1.28. The Minnesota case, as you know, as I said in the call, is 5.8 million. That's very consistent with that guidance range, Ali.

And the FERC case?

FERC case has been -- we'll hear more about that in May. And that's also -- the high-low in that case is also inclusive in the earnings guidance range.

Okay. Thank you.

Elizabeth Parrella, Merrill Lynch.

Thank you. Just going back to Seren, should we expect to see a sale announcement on that by, say, the end of this quarter?

The end of the second quarter? I think that's possible, Elizabeth. We are expecting to close this thing in the third or fourth quarter of this year. We've got some regulatory processes we would go through after that. We're down on the short list now. So that's a very likely possibility.

In terms of your expected cash proceeds and NOL and the reserve you took, based on what you've seen in the short list are those still reasonable numbers? Are you looking at that every quarter in terms of whether you need to make additional adjustments?

Yes, we do look at it, and they are still reasonable assumptions.

Okay. Thank you.

Thank you, Elizabeth.

Ashar Khan, SAC Capital.

Good morning.

Good morning.

Ben, as we -- you mentioned you made certain adjustments in your forecast, but they come out in the same range. Can you just elaborate? I guess one thing which you mentioned is that you're expecting lower sales growth for '05 based on the first quarter. What are the offsets to that which improve things to remain within the same guidance range?

Well, we also changed the effective tax rate. We lowered that by a percentage point. So that mitigates the sales piece a bit. There's a whole host of assumptions that have fairly wide ranges. We're one quarter in a four-quarter year, so, I mean, I think we're -– the $1.18 to $1.28 we're very comfortable with.

Okay. And just so we can monitor, I know in the second quarter you also had some good short-term sales last year. Could we -- is that forecasted for this second quarter, or are you going to see a little bit slippage on that wholesale section in the second quarter as we look forward?

Now, what we saw in the first quarter was entirely expected. Keep in mind we had the $17 million capacity sale that improved '04 results. We're right on track with the earnings guidance assumption as it relates to short-term wholesale margins.

Okay, okay. So for second quarter, we should expect similar levels for the second quarter of '04?

Well, I think we just focus on the full year.

Okay, okay.

There's always going to be volatility in those things. As you know, we don't sell forward, we generate those margins in the real-time markets.

Okay, okay. I appreciate it. Thank you.

You're welcome.

Charles Fishman, A.G. Edwards.

Good morning. Just a couple questions on CapEx. I noticed the MERP Project CapEx in 2006 is about $100 million more from the last number I saw, yet when I add up the total it appears to be on budget. Am I looking at that correctly?

You are, Charles. We just moved some of the timeframes around. The overall project is still the same dollar amount.

Okay. And then at the bottom of the CapEx table there's a footnote that it doesn't include the new EPA rules. Can you give us any ballpark, any color on what you're going to have to do -- ballpark with respect to dollars, any color on what's going to be necessary?

I can give you more color than I can give you ballpark, but -- because we are looking at the rules now. Keep in mind, Charles, that the states then have the opportunity to shape those allocation rules too. So we're developing what the range of scenarios are; and as soon as we're comfortable with that, we'll release it. But let me give you a little sense of where we think we are. The CAIR rules will apply to NSP and SPS. Colorado is carved out of the SOx and NOx requirements. We really have a great head start in Minnesota with the MERP Project. We're generating SO2 allowances. In Texas and SPS, it'll probably be a combination of capital expenditures as well as purchases of allowances in the future.

Now, mercury rules, which are expected to come out soon as well, will impact all of our jurisdictions; but here again, I think we've made some great strides. The best example of that is in Colorado with the Comanche 3 plant where we are installing mercury abatement equipment which will put us in a very good position to meet the new rules.

Now, do you generate any SOx -- NOx credits in the -- with MERP Project, or is that -- Minnesota not covered in that?

Well, we're going to generate SO2 allowances. We had -- I'll throw that to Dave Sparby on the NOx side. I don't know what we're generating there.

I don't have a number on that with me, but we can provide that.

Okay.

Okay. But you would generate some from the MERP Project as you convert to gas?

I believe the answer to that is yes, Charles, but let us double-check that.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Reza Hatefi, Zimmer Lucas Partners.

Good morning. For your '05 guidance when you're saying that no additional margin impact results from few allocation issued at SPS, is this number equivalent to the $25 million number which is mentioned in one of the notes in the press release?

I didn't get -- the 20 -- you're talking about the SPS fuel reconciliation issue?

Yes, the part that's a key assumption for the '05 guidance. Is that $25 million that number because up in the note 6 of the press release you mention a $25 million number accrued in the fourth quarter of '04?

Yes. The $25 million settlement agreement is consistent with what we accrued in the fourth quarter of '04.

So the $25 million number is the total number that we should be excluding from our '04 basis to get to our '05 guidance? That is the margin impact that you mention in the key assumptions?

Yes, the margin impact happened in '04, and it's very close to the amount we've agreed to. We don't expect any impact in '05.

So 25 million. Great. Thank you.

Ali Agha, Wells Fargo.

Thank you. Ben, any update -- I know last time you went into a little more detail on this whole corporate life insurance tax benefit. Obviously you've kept that in the assumptions going forward. Any update on what's going on there?

Well, Ali, the FASB still has not issued their exposure draft. We do expect that to be issued at the end of May. Once it's issued you then have a 60-day commentary period, then FASB will take those comments and decide what their next steps are. It can still be potentially adopted for 2005, which would impact, obviously, our earnings, not our cash.

Let me tell you what I do know about the proposal, and what potentially will come out in the exposure draft. And it's really a two-prong test now. There's a probable standard that we -- that currently is being proposed to be applied for future benefits, and a most likely standard that would be applied for past benefits that were recognized. So what that would probably mean if all of this held true and it was adopted and without any changes is that we would most likely not be able to recognize the tax benefits on a going forward basis until we actually resolved it through the courts, but we would most likely not have to reverse out the benefits we've recorded in prior periods.

I see. So worst case scenario, this would be really $0.09 that would go away starting in '06, maybe some in -- back in '05?

It goes back to -- what is it Teresa?

It would be '05, if it's [inaudible] January 1st.

Right, right. I'm sorry, yes, that's right.

That's right. Okay. Thank you.

Hey, Ali, the other thing you probably would be interested in, and people on the call would be interested in, is where we are on the litigation side. We are planning on filing next week a Motion for Summary Judgment with a hearing date scheduled in mid-June. This is a -- our decision to try to get this thing behind us as quickly as possible. Again, we think our facts put us in a potentially a good light in seeking a summary judgment. If that happens, we could expect to have an order as early as this year, and then it probably would have an appeal process.

I see. Thank you.

Charles Fishman, A. G. Edwards.

Just as a follow-up, I was wondering if you could provide a little more color on the $6 million benefit of lower unrecovered costs, including, evidently, some kind of hedging at PSCo?

You're talking about in the electric utility margin?

Yes, yes. The 6 million benefit to electric margin. Was that a marked to market on a hedge at PSCo, or what exactly was that?

I think that the biggest driver of that was in '04 we weren't allowed to recover some hedges through the UCA mechanism and that didn't happen in '05.

Got it. Okay, thanks.

Elizabeth Parrella, Merrill Lynch.

Yes. Could you update us on the status of the FERC market power filing that you made a couple of months ago?

We filed in that February, Elizabeth, as you know. We did not pass the market screens. We're really now waiting for FERC. FERC will at some point in all likelihood ask us then to perform a delivered market price test -- a delivered price test, rather, and we're currently working on that analysis. We are very optimistic that our participation in the MISO Day 2 market goes a long way to addressing those market power issues. MISO -- the MISO region, of course, is the area we have been generating the lion's share of our margins. We'll look to do the other mitigation measures as well with FERC. Overall, I really don't think that this issue will have a significant impact on our ability to generate margins -- wholesale short-term margins.

Just as a follow-up I know on the last call you talked about, kind of, the uncertainty around MISO Day 2. Obviously, it's only been a few weeks in play, so could you just talk about what the operational and market experience has been under that structure?

Yes, and you know it started up on April 1st, so it's a little early to really think if we have any trends, but what we are seeing in the first month of operation is basically less imports being brought into the system and more use of the generation that's inherent in the region, so we're seeing peakers being dispatched more often, for example, rather than being displaced with imports. Overall, the reliability's been fine. Longer term, we are looking for the efficiencies of the Day 2 market to benefit our customers.

And that should be net positive for the short-term wholesale margins, I would think, as long as you're being compensated for at least your cost of, say, operating those peakers or whatever.

Yes, it is, but coming into the market, as I mentioned in the call, I think there was less market activity as people were getting ready for Day 2. As we're into the market, there's a whole new set of rules and market procedures that our group needs to understand as to all the participants. And we are generating margins, but they will come in a different way in a different method than what we've seen in the past, Elizabeth.

Okay. Thank you.

Peter Hark, Talon Capital.

Yes, good morning. I'm sorry if this has been asked already. I just joined the call. On Comanche station, we were looking for environmental approvals for that project. I was wondering what the status is of that.

Yes, everything's on track with Comanche 3. We were just issued draft air permits from the Colorado Department of Health. There's a hearing that takes place now. Just getting the draft air permits, I think, is a real positive first step. We've also made significant progress in selling down the project. You'll recall that the plant itself is a 750-megawatt plant, but we had plans to sell down 250 megawatts of that. Well, we just entered into an agreement with Intermountain Rural Electric for a good portion of that 250 megawatts. So things are moving along well there.

Right. I guess you were looking for also a contract with Holy Cross Energy to take a portion of the plant as well. Is that on track?

That hasn't been executed at this point. The big one, though, was Intermountain.

Okay. Okay. Thanks. And then separately was on the wholesale margins. I guess part of the guidance for this year was the decline of 30 to $50 million roughly of wholesale margins. First, what is the timing of that? Is that more like a third quarter roll off? And how does it jive with what you're seeing in terms of actual wholesale pluses or minuses so far this year?

Well, we're really right on track for the first quarter where we thought we would be. I don't have it broken out quarter by quarter for '05 what you can expect. What we did know is that last year we had a $17 million contract that we knew wasn't in place coming into this quarter, so the results are very consistent with our annual guidance.

Okay. Perfect. Thank you.

Steven Wang [ph], Smith Barney.

Hi, Ben. Good morning.

Good morning.

Just a quick thing that I noticed here. I'm sorry if somebody already asked this, related to the MERP Project. It looks like CapEx is being shifted quite a bit up versus your previous discussions here to -- more into '06 and I guess from '07. Does that -- I guess in the past you guys had talked about the need potentially to issue equity to help fund this big CapEx rollout that you have going forward. With the shift of MERP moving up more into '06 by about 110 million or so, does that put any timetable change in terms of that potential?

No, not really. I mean we -- based upon our cash flow projections and our capital expenditure forecast, we don't see any equity issuance in '05 or '06 outside of the normal dividend reinvestment programs. After '06 as we said before, we'll see where we are, what took place in the regulatory arenas and where our CapEx and other things are, and then we'll reassess what we need to do then.

And then in terms of -- just a quick highlight here on the rating agencies. I know S&P had taken the Colorado PPA agreement and considered it as debt. Now that you guys have restructured that a bit out in Colorado with the rate treatment that you filed for, have the agencies come back with any new discussions on that on how they treat all that going forward?

I think they're very pleased with that and we've -- we constantly stay in touch with the agencies. We've had meetings with those, both Moody's and S&P and I think those meetings went very well. I don't really think you'll see any change in our credit ratings for the foreseeable future.

Great. Thank you.

Gentlemen, there's no further questions at this time. Do you have any further comments that you'd like to make?

No, I just want to thank everyone for participating on our earnings call this morning. Look forward to meeting many of you at the upcoming AGA meetings and throughout the rest of this year. And just as a reminder, if you have any follow-up questions, Dick Kolkmann and Paul Johnson will be available to take your calls. Thank you.

Ladies and gentlemen, thank you for participating in today's Xcel Energy first quarter 2005 earnings conference call. This conference will be available for replay beginning at 1 p.m. Eastern today through 11.59 p.m. Eastern on April 30th. The conference ID number for the replay is 5050529. Again, that's 5050529. The number to dial for the replay is 1-800-642-1687 or 706-64591. Thank you, ladies and gentlemen. You may now disconnect.