埃克西爾能源 (XEL) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Xcel Energy third quarter 2010 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) As a reminder, today's conference is being recorded, Thursday, the 28th of October, 2010. I would now like to hand the conference over to Paul Johnson, Managing Director, Investor Relations, and Assistant Treasurer. Go ahead, sir.

Thank you, and welcome to Xcel Energy's third quarter 2010 earnings release conference call. I'm Paul Johnson. With me today are Ben Fowke, President and Chief Operating Officer, Dave Sparby, Vice President and Chief Financial Officer, Teresa Madden, Vice President and Controller, Scott Wilensky, Vice President, Regulatory and Resource Planning, and George Tyson, Vice President and Treasurer. Today, we plan to cover our third quarter results, provide a business update, and introduce 2011 guidance. Please note that there are slides that accompany the conference call which available on our web page.

I want to remind everyone that some of our comments may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and in our filings with the SEC. Today's press release refers to both GAAP and ongoing earnings. Third quarter GAAP earnings for 2010 include $25 million, or $0.05 per share of non-reoccurring earnings related to the settlement of a lawsuit with Provident Insurance Company regarding our discontinued, Company Owned Life Insurance program, or COLI. Our comments this morning will focus on ongoing earnings. A reconciliation of ongoing earnings per share to GAAP earnings per share is available in our press release. I'll now turn the call over to Ben.

Thanks, Paul, and good morning. Today, we reported third quarter, ongoing earnings of $0.62 per share compared with $0.48 per share in 2009. The increase in our quarterly results was largely due to warm weather, rate relief, and the implementation of seasonal rates. As a result, we now expect our 2010 ongoing earnings to be in the upper half of $1.55 to $1.65 per share guidance range. Compared to last year, third quarter earnings increased $0.09 per share due to weather. You might recall that we experienced an unusually cool third quarter last year which reduced earnings by $0.05 per share. This year, we experienced warmer than normal temperatures which help increase earnings by $0.04 per share.

The warmer temperatures also produced severe weather throughout our service territory including flooding in Minnesota and Wisconsin and a significant increase in lightning strikes in the Twin Cities. I'm proud to note that we maintained our system integrity and delivered a high level of customer service despite the impact severe weather had on our system. Residential customer satisfaction ended the quarter at 92% which is above our goal for 2010. Our ability to maintain a high level of customer service during the quarter is attributable to our longstanding commitment to make investments in our system. Let me bring you up to date on some recent developments.

In Colorado, interveners filed testimony to our recommended plan to comply with the Colorado Clean Air-Clean Jobs Act. Our plan must consider emission controls, plant refueling, or plant retirement of at least 900 megawatts of coal-fired generation. We analyzed numerous alternatives and scenarios and came up with our preferred plan based on a balanced approach to reduce emissions at the lowest cost to our customers. Our recommended plan would retire about 900 megawatts of coal generation, repower it with approximately 890 megawatts of natural gas generation, and install pollution control equipment on another 950 megawatts of coal generation.

Last week, the Colorado Commission decided that our preferred plan did not meet the legislation's deadline for full implementation by the end of 2017. This decision affects our preferred plan. Specifically, the proposal to retire the fourth unit at Cherokee and replace it with a new natural gas-fired, combined-cycle unit by 2022. In response to the Commission's decision, we filed an alternative plan which we feel is the next best option. The alternative plan would retrofit instead of retire Cherokee's fourth unit with highly efficient pollution control equipment. Overall, the alternative plan would still retire approximately 550 megawatts of coal-fired generation at Valmont and Cherokee. And once implemented, our alternative plan would reduce NOx emissions by 85% and enable us to meet Colorado's carbon dioxide reduction goal of 20% by 2020. We estimate that customer bills would increase 1.7% annually to achieve these environmental improvements.

We also studied an option to accelerate our preferred plan by five years and retire Cherokee Unit Four by 2017. Additionally, we looked at an alternative to permanently switch Cherokee Unit Four to natural gas in 2017. Both of these options have a higher near-term impact on customer bills than our alternative plan, but we have identified them for Commission's consideration. Ultimately, our proposed plans balance significant environmental benefits while minimizing the cost impact to our customers. We expect the Colorado Commission to issue a decision in mid-December.

Also in Colorado, we made great progress in our planned acquisition of two natural gas generating assets from Calpine. Last month, we reached the partial settlement with the CPUC staff, the Colorado Independent Energy Association, and the OCC prior to the case going to hearing. As part of the settlement, we agreed to reduce the annual revenue requirement by $3.9 million. In mid-October, the CPUC approved the acquisition purchase price and the cost recovery settlement. We anticipate closing on this transaction in December. I'll now turn the call over to Dave who will walk you through our third quarter results, provide a regulatory update, and introduce our 2011 earnings guidance. Dave?

Thanks, Ben. Let's start by reviewing third quarter results at each of our subsidiaries. Earnings at PSCo increased $0.09 per share. The increase was due to a variety of factors including rate increases associated with the 2010 electric case, timing issues related to the implementation of seasonal rates, and warmer than normal weather. At NSP Minnesota, earnings increased by $0.04 per share, largely due to warmer temperatures and weather-normalized sales growth. Earnings at NSP Wisconsin increased $0.01 per share due to warmer than normal temperatures and the implementation of new electric rates. Earnings were flat at SPS.

Now, I would like to discuss the drivers that affected the various lines of the income statement beginning with electric retail market. Electric margin increased $183 million for the quarter. Warmer than normal temperatures this quarter, compared with cooler than normal temperatures last year, resulted in a $58 million improvement in electric margin. Electric margin also increased by $88 million for the Colorado rate cases -- for the rate cases in Colorado, Wisconsin, South Dakota and New Mexico and the implementation of seasonal rates. As part of the rate design portion of the Colorado rate case, seasonal rates were implemented this summer. Seasonal rates are designed to be revenue neutral on an annual basis with higher rates in the summer months and lower rates throughout the other months of the year. As a result, revenue at PSCo was higher during the third quarter. Looking ahead, we anticipate that the impact of higher summer rates will be mitigated during the fourth quarter of 2010 and the first half of 2011. As a result of the implementation timing of seasonal rates in the summer of 2010, we anticipate a positive impact this year.

Other factors that improved third quarter electric margin are detailed in our earnings release. Before I leave electric margin, I want to point out that our sales continue to reflect a recovery in our service territory. Our year-to-date electric sales are up 1.4%. We now expect annual sales growth of approximately 1.2% to 1.4%, slightly above our original forecast of 1% growth.

Turning to our natural gas business, margins increased $6 million for the quarter. The increase was driven primarily by interim rates in Minnesota and conservation revenue which is largely offset by conservation and DSM expenses. Now, offsetting some of the improvement in margins, third quarter O&M expenses increased by $43 million, or 9%. Factors driving the third quarter increase in O&M expenses included $14 million for higher employee benefit costs related to performance-based incentive compensation and pension costs, $7 million of higher labor costs, $7 million of higher plant generation costs, $5 million of nuclear plant operation cost, and other items totaling $10 million. We continue to make the necessary investments in our system to maintain a high level of reliability. The warmer than normal summer temperatures provided additional margin. Therefore, we decided to spend additional O&M to ensure continued system reliability and customer satisfaction. As a result, we now project our annual 2010 O&M increase to be between 8% and 9% which is above our original guidance of an increase of 6% to 7%.

Also, offsetting the improvement in margin, third quarter depreciation and amortization rose $23 million, or 12%. The increase was related to Comanche Three coming online in the second quarter and our continued investment in our utility system. We continue to forecast D&A to increase $35 million to $45 million in 2010.

Turning to income taxes, our effective rate for the third quarter came in at 34.7% and was 320 basis points lower than the comparable period last year. The higher effective tax rate experienced during the third quarter of 2009 was due to the recognition of additional unitary tax expense and the establishment of a valuation allowance against certain state tax carryovers that were set to expire. We continue to expect our 2010 effective tax rate to be in the 35% to 37% range. Let's move on to our recent financing activity.

To date, we've raised $1.5 billion to finance our growth strategy. With our stock trading near its 52-week high in early August, we sold almost 22 million shares of common stock through a forward equity agreement. This transaction covers our equity needs in 2010 and 2011 and captures the accretion of our anticipated acquisition of two natural gas plants from Calpine. We expect to physically deliver the shares of common equity in the fourth quarter to close out the forward agreement. Also, in August, at NSP Minnesota, we issued $250 million of five-year first mortgage bonds at 1.95% and $250 million of 30-year first mortgage bonds at 4.85%. These bonds are temporary -- set temporary records for the lowest coupons at the time. Now, looking ahead, we plan to issue approximately $400 million of first mortgage bonds at PSCo before the end of the year.

Now, let's turn to an update of our pending rate cases. In Minnesota, we are currently seeking a gas rate increase of $10 million based on a 10.6 ROE. The case is coming to a conclusion, and we anticipate a decision from the MPUC later this quarter. In Wisconsin, we recently filed an application with the Public Service Commission requesting to reopen the 2010 rate case and increase electric rates by $29 million based on a 2011 test year. The request -- requested increase is primarily related to production and transmission fixed charges. We anticipate a ruling by year-end.

In Texas, we filed for a $62 million electric rate increase last May. In September, we filed an agreement with intervening parties to abate the original procedural schedule. As part of this agreement, interim rates will become effective in the middle of February, 2011. If we cannot reach a settlement agreement in the coming months, the procedural schedule would begin with the intervenor testimony in January, 2011.

Finally, we plan to file an electric rate case in Minnesota in early November with interim rates subject to refund going into effect in January, 2011. We expect the Commission will rule on this request in the fourth quarter of 2011. This case will be driven by continued capital investment in Minnesota and rising nuclear, pension, and medical costs. We are in the process of finalizing our filings and anticipate seeking a 2011 rate increase in the 5% to 7% range. We will provide you more details on the Minnesota rate case at our New York analysts' meeting in early December.

Now, before I turn the call over to you for questions, I have just a few more items. This morning, we are introducing our 2011 ongoing earnings per share guidance range of $1.65 to $1.75. The list of the assumptions for our earnings guidance can be found in today's press release. However, some of the key assumptions and drivers include constructive outcomes in all rate case proceedings, weather-adjusted retail electric utility sales, normalized for the planned sale of our Lubbock distribution assets to grow about 1%, O&M expenses to increase 3% to 4%, depreciation expense to increase $55 million to $65 million, and common stock and equivalents will increase to 485 million shares, reflecting the forward equity sale we entered into this summer. The 2011 guidance range is consistent with our long-term earnings growth target of 5% to 7% whether you use the 2009 ongoing results or a normalized 2010 earnings as the base.

In summary, this was another great quarter for Xcel Energy. We delivered strong earnings, enjoyed better than expected sales, completed a forward equity sale, and issued bonds at record-low coupon levels. Maintained a high level of customer service, received Commission approval for our acquisition of two natural gas plants, filed our recommended plan for the Colorado Clean Air-Clean Jobs Act, and received a $25 million settlement in our COLI lawsuit. We're pleased to be in a position to deliver 2010 ongoing earnings in the upper half of our guidance range of $1.55 to $1.65 per share and initiate 2011 earnings guidance consistent with our long-term growth objectives. This concludes my remarks. We're now ready for questions.

Yes, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Ashar Khan with Visium Asset Management. Please go ahead.

Good morning.

Good morning, Ashar.

Could you just help us that what kind of ROEs will you be -- in your 2011 guidance? What kind of ROEs could you go through each of the subs because now you report them? But what kind of ROEs will they be earning at each of the subs in 2011?

We don't provide guidance by sub ROEs, Ashar.

Okay. But generally, what kind -- could you give us a weighted average ROE that you expect to be in 2011?

The weighted average we expect this year is about to earn just a slightly over 10%.

Okay. And next year?

Next year, we should be expecting to do about that or slightly better.

Or slightly better. And how much -- what would be a weighted average allowed ROE? How much is there for regulatory lag between the two?

We're earning about 10.5% -- or seeing about 10.5% on a weighted average today from commissions, and it has been gradually sort of moving down a little bit throughout the year.

Okay. So, you're pretty much -- the regulatory lag as you look at '11, it is pretty much eliminated as we look at 2011.

Ashar, this is Ben. I hope you're doing well. Keep in mind when we talk about a consolidated ROE, that also includes the holding company as well. So, despite the regulatory improvements we continue to make, regulatory lag in this -- the years to come, we're going to spend the -- be expending significant capital is something that we'll continue to have to address. We have plans to do that. But we still have -- I would consider significant lag between authorized versus earned ROEs. So that is opportunities for improvement, obviously.

That would be what, Ben, around what would you say, around 50 basis points or so?

I think it depends on the year, Ashar. It really depends. But I would say 50 at minimum.

Okay. And then can I just ask you, what other rate cases should we expect? Do we expect a Minnesota filing pretty soon? Or which supports the '11 guidance, or what?

Ashar, I think you should expect a Minnesota case and a case in North Dakota as well as a New Mexico case. All being filed at the end of either this year or the beginning of next year. Now, there will also be some smaller cases. A PSCo wholesale case, for example, that we'll file as well as a PSCo gas case over the course of next year.

Okay. And then if I can just -- this guidance range. Sorry, the earnings long-term growth rate. With the Colorado Clean Air expenditures, I guess they get approved and get finalized. Does it allow you to go toward the higher end of that range? Or, no?

Well, the expenditures are over a long period of time, Ashar. And there's several other projects. There may be some of those years where we're likely to be in the upper half of the range. But over the six or seven years of construction, there will also be some years where we're in that 5% to 6% range.

Okay. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Angie Storozynski with Macquarie. Please go ahead.

Thank you very much. Hello. How are you?

Good.

Two questions. One, the pickup in O&Ms that we're seeing in 2010? Are these O&Ms that were simply deferred since '09? Or are you just simply trying to use the weather -- favorable weather in this year to move some expenses forward from 2011?

Angie, there is a couple of buckets there. Some of these expenses -- it made sense to accelerate while we were in an area doing pole replacement, for example. We took advantage of opportunities to do some of that work that was also included for 2011. We also did some -- plan for some heat-related and reliability-related maintenance where it made sense. Particularly if it related to, for example, a NERC standard. So, what we tried to do is we did have a little bit more flexibility this year with some margin. We looked at the work that we were intending to accomplish. How we could maximize that, and that's what our plan reflected.

Okay. And also, you have -- you mentioned your financing activities. Now, it seems like you have debts -- pretty expensive debt maturing over the next two years. How should we think of it? If you refinance it, assuming that the current interest rate environment doesn't change. Do you expect that you will be able to retain the lower interest expense and the lower coupons for your shareholders? Or do you think that you would give it up in future and upcoming rate cases?

Angie, this is Paul Johnson. We do have a couple of bonds maturing in 2012 at NSP Minnesota and PSCo that have high coupons in the 7% to 8% range. Those bonds do include a 'make whole' provision which makes it not economical to call them early. So, we don't intend to do that at this point in time. However, when we do get around to refinancing those bonds, obviously we expect that we would be able to issue coupons at a much lower rate. Particularly with our improved credit ratings. And we would expect that those savings would be passed on to ratepayers when we file rate cases and provide a lot of benefit to customers.

Okay. The last question is the rate cases you mentioned. The filings in Minnesota and North Dakota and New Mexico. Would that impact 2011 results? If I recall correctly, Minnesota has interim rates. Is that correct?

Minnesota has interim rates, and North Dakota does also.

Okay, thank you.

Thank you. Our next question comes from the line of Ali Agha with SunTrust Robinson Humphrey. Please go ahead.

Thank you. Good morning.

Good morning.

Did I hear Ben or Dave correctly that the forward equity sale essentially takes care of your equity needs for 2010 and '11. So in 2012, you may relook and see if there is need for new equity? Is that correct?

Yes. As we approach 2012, we'll take another look at what our requirements are.

Okay. And then the '11 guidance range, $1.65 to $1.75. Now that assumes normal weather. So is the range essentially going to be driven by outcome of rate cases, or where else would you see the Delta there?

Well, of course, Ali, it is always affected by rate cases. But it is also going to be affected by the economy and some of the other fundamentals, of course, that impact our guidance annually.

And do we [declare] the Colorado Clean Air Act expenditures as they ramp up, as I recall, over some years. Do they already factor into that range? Or would they be incremental assuming you get the approval by the end of the year? Where do they fit into the '11 numbers?

Well, there's very little impact, if any, on 2011 resulting from Clean Air-Clean Jobs, Ali.

Right. The ramp-up happens what, '12 through '16, or something like that? Right?

Yes.

And last question, more near-term. You guided us toward the higher end of the range for this year. I would imagine the results through the first nine months --how far above plan are you so far given the help from the weather, et cetera?

Well, right now, we're looking to be right in the -- in that top half of the guidance, Ali. I mean, we've had some -- as we talked about several factors. We have seen the impact of seasonal rates. We've seen the impact of some increased O&M fourth quarter. So, we look to be right within the top half of our guidance range.

Ali, if you look at where we think we're going to end the year. If you normalize it for the ins and the outs and weather. It is probably about in the middle of that guidance range. We're enjoying, obviously, the benefit of weather. But we're also making the commitments to our -- to reinvest and to keep investing in our system. And when we have warm weather, we do that. And as I said in my remarks, I think the fact that we have that strategy is why our reliability continues to be very strong and customer satisfaction very high which is always a good place to be when we're going to be asking for rate relief for the years to come. So, I think our strategy works.

Understood. Thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Danielle Seitz with Dudack Research. Please go ahead.

Thank you. I was wondering, seasonal rates, I didn't catch -- how much did that improve your earnings for the third quarter?

About $43 million, Danielle.

Okay. And am I supposed to be assuming that half of that could be taken out in the fourth quarter?

About 40% or so, yes. Almost half.

Okay. And when you are talking about the Colorado Clean Air Act and your plan, it seems that the numbers are not exactly precise yet? Or do you anticipate -- do you know about how much it will cost for the period 2012 to 2014?

Danielle, it's -- you're right. The numbers aren't precise yet. It is still in hearing. The Commission will decide on the very specific plan in December.

Okay. And your total number when you filed was roughly how much? Was there a number to it?

The number, including the improvements in gas, through 2022 was about $1.4 billion.

Danielle, we included in the press release what the expenditures would be through 2017 under our recommended plan. Now, depending on what plan the Commission picks, that will change a bit. And most likely what will happen is expenditures that we hadn't targeted in '22, some of those would most likely be accelerated into a more near-term time frame through 2017. But more to come on that, to Dave's point.

Okay. So, the timing is more of the essence at this point than the amount. To say.

Well, it will be a little bit of both. Again, it depends on what plan the Commission picks. And the issue there, as you know, is that the Commission interpreted the legislation as everything having to be fully implemented by 2017. Our preferred plan extended the Cherokee Unit Four plan to 2022. We'll see some changes with that.

Thanks.

Thank you. Our next question comes from the line of Timothy Yee with KeyBanc Capital Markets. Please go ahead.

Hello. The $88 million electric margin increase that you saw due to rate increases and seasonal timing? Do you have a split on how much was between the two? And how much of that you would expect to reverse in the fourth quarter due to timing?

Yes. About $43 million of it was related to seasonal rates. The rest, rate increases. As we talked about, 40% or so of the seasonal rates will reverse out. Over this quarter. The rest will reverse out, of course, over the next couple quarters in next year.

Okay. Thank you. Then just a follow-up on the Cherokee unit. About how much of those costs, if the Commission decides to go with the plan in 2017, would be accelerated from the 2022 time frame?

About $150 million.

Great. Thank you very much. Thank you.

Thank you. At this time, I'm showing no further questions in queue. I'll hand it back to management for any further remarks.

Well, I want to thank all of you for participating in our third quarter earnings call this morning. We look forward to meeting with many of you at EEI next week. In addition, I hope you'll join us at the New York Stock Exchange on December first for our Annual Investor Meeting. If you have any follow-up questions, the IR team is available to take your calls.

Ladies and gentlemen, that does conclude the Xcel Energy third quarter 2010 earnings conference call. This conference is available for replay. If you would like to access that, please dial 1-800-406-7325 or 1-303-590-3030, entering the access code 4371950. Thank you for your participation. You may now disconnect.