埃克西爾能源 (XEL) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Xcel Energy fourth-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. And following the presentation instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, January 27, 2011. I would now like to turn the call over to Paul Johnson, Managing Director of Investor Relations and Assistant Treasurer. Please go ahead.

Thank you, and welcome to Xcel Energy's year end 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 Resource Planning; and George Tyson, Vice President and Treasurer.

Today we plan to cover our 2010 year-end results, provide a business update and reaffirm our 2011 guidance. Please note there are slides that accompany the conference call which are available on our webpage.

I want to remind you that some of the comments we make today will contain forward-looking information. Significant factors that could results to differ from those anticipated are described in our earnings release and our filings with the SEC.

You will notice that today's press release refers to both GAAP and ongoing earnings. 2010 ongoing earnings per share were $1.62 compared with $1.50 per share in 2009. 2010 GAAP earnings per share were $1.62 compared to $1.48 in 2009.

We believe that ongoing earnings, which removes the impact of our discontinued company owned life insurance program, Medicare Part D and discontinued operations, provides a more meaningful comparison. As a result we will discuss ongoing earnings during this call. Please see our earnings release for a detailed reconciliation of GAAP and ongoing earnings results. I'll now turn the call over to Ben Fowke.

Well, thanks, Paul, and good morning, everyone. I'm pleased to announce that Xcel Energy enjoyed another successful year. I'll touch on a few of the highlights and Dave will discuss our detailed results in a few moments.

As Paul just mentioned, we reported 2010 ongoing earnings of $1.62 per share compared with $1.50 per share in 2009. We feel good about delivering earnings results in the upper half of our 2010 earnings guidance range of $1.55 to $1.65 per share. This marks the sixth consecutive year that we've met or exceeded our annual earnings objective.

We were also successful in meeting other financial objectives. We raised the annual dividend $0.03 or 3% to $1.01 per share and our credit ratings also improved as S&P raised its rating on Xcel Energy and three of our operating companies by one notch.

In a year where we experienced hot weather throughout our system I'm proud that we maintained our system integrity and once again delivered a high level of customer service. We achieved a customer satisfaction rating of 92% for the third consecutive year.

In 2010 we completed two major construction projects -- Comanche 3, an 800 megawatt coal plant in Colorado, and Nobles, a 201 megawatt wind farm in Minnesota. We also began construction on the CapX2020 transmission project.

In addition, we finalized the purchase of two natural gas plants from Calpine. This asset acquisition will save our customers money in the long run and will also be accretive to 2011 earnings. We were able to finance this transaction and other components of our growth strategy by raising $1.9 billion in the debt and equity markets at very attractive rates.

Lastly I'll provide a few comments regarding the Clean Air Clean Jobs Act in Colorado. In December the Colorado Commission approved a plan for PSCo to reduce annual emissions of nitrogen oxide by at least 70% to 80%. The plan is designed to achieve this goal through a combination of retiring older less efficient coal plants, re-powering to natural gas and installing emission controls by 2017.

The primary difference between our recommendation and the CPUC approved plan has to do with Cherokee Unit 4. Under the approved plan we will fuel switch Cherokee Unit 4 to natural gas.

The Commission also provided for a recovery on construction work in progress in future rate cases. In addition, they incurred stakeholder meetings to discuss a multi-year rate plan. In January the Colorado Air Quality Control Commission approved incorporation of the Clean Air Clean Jobs plan into Colorado's Regional Haze State Implementation Plan.

Next in the process the Colorado legislature must approve the state implementation plan. Upon legislative approval the state implementation plan will be sent to the governor for signature. Our total investment for the plan is estimated to be approximately $1 billion over the next seven years and is expected to increase customer bills on average by about 2% annually.

I think this is another great example of our ability to work with key stakeholders to arrive at a creative solution to reduce emissions while ensuring timely recovery of cost. In summary, this was a really great year for us. I'll now turn the call over to Dave Sparby who will walk you through our results and provide a regulatory update. Dave?

Thanks, Ben. Let's now take a look at details of 2010 starting with a review of the annual financial results at each of our operating companies. Earnings at PSCo increased by $0.14 per share in 2010; the increase was largely due to new electric rates and warmer summer temperatures partially offset by higher O&M, depreciation and property taxes.

At NSP Minnesota earnings decreased by $0.04 per share for the year, largely due to higher O&M, depreciation and property taxes partially offset by warmer temperatures, incentives under our conservation programs and weather normalized sales growth.

Earnings at NSP Wisconsin decreased $0.01 per share due to fuel recovery and higher O&M expenses, partially offset by warmer than normal temperatures and the implementation of the new electric rates.

Earnings increased $0.02 per share at SPS due to electric sales growth, the reversal of previously established fuel cost allocation reserves and lower interest expense partially offset by higher O&M expenses.

Now I'd like to discuss the drivers that affected the various lines of the income statement beginning with retail electric margin. Electric margin increased by $408 million for the year, approximately $228 million of the improvement in electric margin was due to the implementation of new rates in Colorado, Wisconsin, South Dakota and New Mexico.

Warmer than normal temperatures in 2010 compared with cooler than normal temperatures last year resulted in a $65 million improvement in electric margin. Conservation and DSM revenue, which is partially offset in expenses, contributed $72 million of the improvement.

Finally, retail sales, adjusted for weather and the sale of our Lubbock distribution assets, increased 1.4% and contributed $18 million of improvement in margin. Other factors that had a smaller impact on 2010 electric margin are detailed in our earnings release.

Turning to our natural gas business, margins increased $20 million for the year. The increase was driven primarily by conservation revenue which is largely offset by conservation and DSM expenses. In addition, we implemented new rates in Minnesota.

Higher costs partially offset the increases in electric and gas margin. We are investing significant levels of capital, which is growing rate base 7% annually. As you would expect, this is resulting in additional O&M, depreciation and interest expense. In 2010 our O&M expenses increased $149 million or about 8%.

As a reminder we decided to invest additional O&M in our generation, transmission and distribution system after a summer of prolonged hot weather. We made those investments to ensure that our customer service and reliability remain at levels our customers have come to expect.

Approximately $77 million or roughly one-half of the increase in 2010 O&M expenses came from higher plant generation, nuclear plant generation and nuclear outage costs. These costs increased as a result of higher levels of maintenance and overhaul work, incremental operating costs associated with new facilities, and increased security costs for nuclear plants.

Other factors contributing to the increase in O&M expense included $24 million of higher labor cost, $18 million of higher contract labor cost, $15 million of higher employee benefit cost largely due to rising pension costs, and other items totaling an increase of $15 million. Looking ahead to 2011 we project our O&M expenses to increase approximately 4%.

Now also offsetting the improvement in margin, depreciation and amortization rose $41 million or about 5%. The increase was related to Comanche 3 going into service in the second quarter and our continued investment in our utility system.

Turning to income taxes -- our effective tax rate on income from continuing operations came in at 36.7% and was 160 basis points higher than last year. The effective tax rate experienced from 2010 was due to the following items -- the elimination of tax benefits for Medicare Part D, subsidies, and an adjustment related to the COLI tax court proceeding.

Those items were partially offset by the reversal of a valuation allowance for certain states tax credit carryovers. We anticipate that our 2011 effective tax rate will be in the 34% to 36% range.

Now let me give you an update on our pending rate cases. In November we filed a request in Minnesota to increase electric rates approximately $150 million or 5.6%. The filing is based on a 2011 forecast test year, an 11.25% ROE, a rate base of $5.6 billion, and a 52.6% equity ratio.

We also requested to increase 2012 rates by an additional $48 million for known and measurable cost increases. Interim rates of $123 million subject to refund went into affect earlier this month. We anticipate a decision from the Minnesota Commission in the fourth quarter of 2011.

In December we filed a request to increase electric rates in North Dakota by approximately $20 million or 12%. The filing is based on a 2011 forecast test year, a requested ROE of 11.25%, an electric rate base of $328 million, and an equity ratio of 52.6%. We also requested to increase 2012 rates by an additional $4 million or 2.6% to recover certain known and measurable cost increases.

In January the North Dakota Commission approved our request for interim rates of approximately $17 million effective in February. We anticipate a decision from the North Dakota Commission in the fourth quarter of 2011.

Now in December we filed a request to increase Colorado retail natural gas rates by approximately $28 million. The request is based on a 2011 forecast test year, a 10.9% ROE, a rate base of $1.1 billion, and an equity ratio of 57%. We anticipate a decision later this year with new rates effective this summer.

In Texas we have revised a request to increase electric rates by approximately $48 million on a net basis. The filing is based on a 2009 test year adjusted for known and measurable changes, an 11.35% ROE, a rate base of a little over $1 billion, and an equity ratio of 51%.

We continue to work with the various parties on a potential settlement. Last week on behalf of all parties we filed a motion to abate the procedural schedule to allow time to complete settlement negotiations. The parties agreed to set February 11 as a deadline to file a stipulation or a status report.

Interim rates subject to refund or the ability to surcharge will be effective in the middle of February. Looking ahead we plan to file New Mexico Electric and PSCo wholesale rate cases in the upcoming months. We will provide additional details on these cases as they become available.

In summary, this was another great year for Xcel Energy. We delivered on our financial objectives, we maintained historically high levels of customer service, we met or exceeded our energy efficiency and conservation program targets, we completed a forward equity sale and issued bonds at record low coupon levels, we completed construction projects on time and on budget.

We acquired two natural gas plants and we agreed to a comprehensive plan to invest $1 billion to reduce emissions in Colorado. Our efforts were also reflected in our stock price. For the third year in a row shares of Xcel Energy outperformed our peer group of mid to large cap regulated utilities. When taking into account the reinvestment of our dividends, we delivered a total return of more than 16%.

We expect continuing success in 2011 and are reaffirming our earnings guidance of $1.65 to $1.75 per share. Please note there are modest adjustments to the earnings guidance assumptions included in our earnings release. These changes largely reflect our current information and 2010 actual results and will not have a material impact on our projected results. This concludes my prepared remarks. We're now ready for your questions.

(Operator Instructions). Michael Worms, BMO.

Thank you, good morning, everyone. Just a quick question for you. Can you kind of talk a little bit about the political environment in Colorado? I believe I read somewhere where some were talking about perhaps trying to reduce the renewable standard going forward?

Yes, Michael, this is Ben. There's a number of legislation that's been introduced in Colorado and that's one of them. I think they want to roll it back. You may recall though that it was just last year that the 30% standard got passed. So we really don't think that will be successful.

I think one of the things we probably need to do a better job of, too, Michael, is communicating with all stakeholders, particularly with some of the controversy around Clean Air Clean Jobs, just how affordable renewables, particularly wind, in all our service territories are -- because it hasn't cost customers money and we think it's positioned us very well for the future, as you know. But that's a long answer. The short answer is that we don't think it will pass.

Okay, thank you.

Paul Ridzon, KeyBanc.

One of the changes in the assumptions was an increase in -- the increase in interest rates -- interest expense declined. What's driving that? Is that lower rates or is that lower paper (inaudible)?

It was the actual results reflecting our bond sale in Colorado, Paul.

And it looks like the Wisconsin debt issuance is no longer in your financing plans. Did something happen there?

No, just more recent information -- updating our models.

Okay. And then just, Ben, you talked a little bit about it, but what kind of controversy are we getting around Clean Air Clean Jobs still? And do you think that's going to go anywhere?

Well, I mean, I think it will pass. And I think the controversy is really kind of localized, Paul. There are portions in our service territory that are mining and coal oriented and, as you know, the act itself had a bit of a controversy nationally, kind of a battleground for coal versus gas. And so I think we're seeing a little bit of the residual of that.

But again, you step back and you look at what that does for our customers and we had to do something to meet the Haze requirement. And rather than -- I think we did a very balanced plan. And I think when you look at the -- again the facts, we're still going to burn coal and we're going to modernize the infrastructure which a lot of this is about and address Haze and other things.

We made a decision to put some pollution control equipment on more modern plants with the later vintage, but some of these plants that frankly go back to the Eisenhower era and are right in the heart of the city, we just determined that it was better to re-power and use those sites but go to gas and rebalance our portfolio. Which, I don't want to go too long on your answer.

But I mean last year with Comanche 3 coming on, a very new modern plant at a great price point, I mean we burned more than 70% of our energy from coal. So this allows us to rebalance the portfolio, modernize it, do all the good things and I think at a very good price point for our customers. However, there's always the vocal few that aren't happy and that's what I think you're seeing here, Paul.

And just separately, given that Dick Kelly is involved at EEI, what's he seeing with regards to any action on how EEI views EPA's upcoming actions and potential for delays or look what could be happening there?

Well, I think what we wanted -- I mean I think what Dick and the industry will concentrate on is trying to get some -- a comprehensive and reasonably balanced approach to addressing some of the environmental regulations that are coming down. Whether that's delays or whether that's just moving to more of a system versus a plant-by-plant kind of approach, I think we -- as a group we're working to get consensus on that.

But I mean what we don't want to see is this avalanche of regulations coming out with very tight time frames and very little flexibility coming upon the industry at a time when that will just raise cost unnecessarily. So I think what Dick will try to do and what the industry will try to do is come up with a more sensible economically-based plan to address some of the concerns. It won't be easy, Paul.

I assume you've had some preliminary discussions with EPA. I mean, do you have a sense there's any flexibility there? It sounds like they're still going to be pretty rigid.

Well, I think they -- to the extent they want some flexibility sometimes -- we just had a court order that said they couldn't even do that. So I think it remains to be seen. I mean, there are discussions, but there's nothing concrete I can point to at this point, Paul.

Thank you very much.

Okay, thanks.

Travis Miller, Morningstar.

Good morning.

Good morning, Travis.

You guys obviously have some good growth priced in, especially in your guidance here coming up next year. Can you give us an idea of how much of that growth in your guidance estimate is AFUDC non-cash earnings and how much would be cash earnings from these rate increases that you've got proposed and coming in from 2011 activity?

Travis, AFUDC is expected to be relatively flat in 2011, so really it's more a reflection of sales growth, rate increases, rider revenue, things like that.

Okay. On the rider part, can you give us an idea of percentage contribution from rider?

Riders are expected to increase about $35 million in 2011.

Great, thanks a lot.

Ali Agha, SunTrust Robinson Humphrey.

Thank you, good morning. Dave, could you let us know what was your actual earned ROE in 2010 compared to the authorized numbers right now?

Well, Ali, at the operating company, I mean they stretch from the mid-eights to over 10. At the holding company level they're a little over 10 for 2010.

Okay. And the guidance you have for 2011, what's kind of implied or embedded in that as far as ROEs are concerned?

We're anticipating fairly close to 10 at the holding company again.

So not a significant improvement year over year?

Well, there's a little improvement. I guess I'm factoring out the weather in that.

Right, right, right. So the numbers you quoted for 2010 were not weather normalized, those were actuals and in 2011 you're assuming normal weather, is that the way to think about it?

Yes, yes.

Okay. And then separately, the CapEx program that you guys have laid out, now a number of these EPA regulations are not firmed up, are still coming down the pike. Given your specific situation, how much availability do you think there is in that CapEx projection that you have depending on what the final EPA regulations across the board may come up? Is there much flexibility for you guys?

Ali, I think that our CapEx projections reflect a -- the most expected outcome. You appreciate going into this we're well-positioned. You saw in our report that we gave in December to all of our investors that we've anticipated most of the regulations as the industry expects them to be put in place over the next several years.

We've also, of course, made significant investments in the past anticipating this. So although I think we could see especially in later years, some variability I think our CapEx as it reflects what we anticipate from EPA is probably pretty close.

Okay. And last question -- in your assumptions you've laid out you've assumed equity of around $75 million for DRIP, etc. Looking at this CapEx program can you just remind us again when do you think you would be in a position where you will start to need external equity beyond that?

What we said, Ali, is we don't need equity in 2011 as we approach the end of the year. We'll evaluate both market conditions as well as our CapEx requirements and we'll provide some additional guidance perhaps in that regard?

I see.

And, Ali, just as a point too, at the analyst meeting that we had in December, we laid out kind of our five-year plan and obviously CapEx is modified a little bit. But over that five-year time frame we anticipate that there might be up to $800 million of just common equity excluding the DRIP program.

Yes, that's in 2011 through 2015 and it's in the slides I had presented, Ali.

Yes, Ali, it's one of the reasons why rate base grows faster than our long-term earnings growth rate.

Right, right, right. And the dividend plan is still the same which will be slightly lower than EPS growth?

The same as it ever was.

Yes.

Or consistent, as we like to say.

It's been steady and consistent, as you know.

Absolutely. Thank you, gentlemen.

Ashar Khan, Visium Asset Management.

Could you just remind us when is the next Colorado rate filing expected?

Well, Ashar, of course we're currently in a gas case right now and the Commission has required that we file before April 2012. And that's all the guidance I can provide to you at this time.

Okay, okay. Thank you.

Neil Kalton, Wells Fargo Securities.

Good morning, everyone. Just -- I'd like to get an update on the High Plains Express, because I think there was a study recently conducted out in the West that -- and it wasn't clear to us whether that had any bearing or implications on the timing of High Plains.

So I'd like to hear your latest thoughts on High Plains, if this is still sort of looking at second half of the decade or is there a chance that we could see some capital flow in the next five years? And then another question to follow up on that is, does your current five-year capital forecast include any CapEx for High Plains?

Neil, this is Ben, I'll kick it off and see if Dave or Scott want to add anything. But our five-year forecast doesn't include anything. I think High Plains is probably going to be in the study mode for quite a while. So I don't anticipate that we'll have that in our forecast anytime soon. Dave or Scott, do you have anything?

All right, thanks.

Jonathan Arnold, Deutsche Bank.

Good morning, guys. My question is, you seemed to have a little downtick in residential usage normalized in the fourth quarter. Give us maybe some insights into that and then maybe marry it together with the decision to slightly bump the sales forecast for 2011 -- will be at a small amount?

Well, first of all, your observation is correct. I mean, there was a little bit of downtick in residential fourth quarter. Some of the economists here, Jonathan, have suggested that the consumer is seeing some increases in CPI, but yet the unemployment rate is staying pretty steady.

So although they're paying about 15% more for things like gasoline, there really hasn't been any more jobs. And that's probably one of the better explanations for just a little bit of softness at the end of the year residentially.

Now we do feel better going into 2011 about the economy than we did in 2010. Those industries that were the best performing sectors in 2010 continue to be strong in 2011. There's a little bit of uptick possibly there, but we are seeing some recovery in a couple sectors of manufacturing also. So we are slightly more optimistic in 2011 about the economy than we were in 2010.

Okay. Could you maybe give us a bit more of a regional sense of what you are seeing across the service territory and where that bullishness is more pronounced?

Sure. Sales have been a little bit stronger from south to north and from west to the east. So we've seen most of our sales growth in for example taxes where the energy sector has been very strong. We've seen sales growth not quite as strong but strong in Colorado where we've seen not only some energy, but also some mining, for example, that we expect to pick up.

And although Minnesota, which is a bit of an anomaly, has one of the lowest unemployment rates, sales have been slow and it's partially because we have a much more diversified economy here including things like food and agriculture, services which have started to look like they'll trend up, but have just come to stabilize here in the fourth quarter.

Thank you, guys.

Daniele Seitz, Dudack Research.

Thank you. I was interested in your detailed O&M and especially the 4% increase you anticipate for this year. Is this because of conscious cost control relative to 2010? And do you think that 4% is a trend or is this just because of timing?

That's a good question, Daniele, I'm glad you asked. When you look at that 4% you have to keep in mind, as Ben has talked about, the amount of plant that we've been adding over time. And you look at 2011 and it will be the first full year of Calpine, it is a partial year of additional expense for Comanche, we've got a full year of Nobles here. And together that's more than $20 million just to serve the additional generation plant.

Now we've got about $20 million of additional in benefits as a result of pension expense and, of course, there's about a $20 million labor increase component on top of that. So the -- the 4% is pretty easily explainable. When you take out the new plant it's less than 3%.

And do you --.

I think it's a pretty good -- Daniele, I think it's a pretty good -- I mean it really reflects too what we think our trend line will be going forward. As to Dave's point, we're increasing rate base, we're putting money into the infrastructure, doing the things I think our stakeholders want us to do.

So you feel you can stay to that 4% to 5% rate over time as well?

It's what we've been doing over the last five years basically. But I think what you're driving at is it takes a lot of productivity improvement to keep it there and that's what we work on.

Right. Thank you very much.

Dan Jenkins, The State of Wisconsin Investment Board.

Good morning. I might have -- first question I had was related to your Texas electric case which you expect rates to be effective here pretty soon. And given that you're in settlement discussions, what's kind of the range -- you asked for $48 million. As far as the parties you're in discussions with, what were their last proposed proposals as far as --?

Oh gosh, Dan, I mean we can't -- we can't discuss settlement negotiations.

No, I mean in the one (multiple speakers)?

They filed no testimony at this point, so there's no (multiple speakers) petition.

Scott, I don't know if you want to comment on -- I think we're making progress in it.

Yes, we're making progress. We actually filed with [ALJ] to set a date to either file a settlement February 11 or to abate the procedural schedule. We think we'll be on target for that and we'll share the results of that. But in this case the parties actually decided to try to work forward with the settlement without the filing of testimony in those stated position as you were looking for, so we don't have that lower [court] benchmark.

Okay. How about the staff, did they have a final position (multiple speakers)?

No, as I said, no party including the staff actually will have filed the testimony staking out their position. Everybody concluded it would be more productive to work towards a settlement prior to doing that.

Okay. I was curious just what was the customer growth for 2010 and then what did you use for your budget as far as customer growth for 2011?

The customer growth for 2010 was about 35,000 customers, that's electric and gas, it's about 6/10 of a percent. And for 2011 it's just a little bit better than that, Dan.

Okay, thank you.

(Operator Instructions). James Bellessa, Davidson & Co.

Good morning. Quarterly PSCo earnings per share were down about 4% due largely to the newly enacted lower seasonal rate. Do you expect that same pattern to occur, that same type of earnings decline in the first quarter because of the same influence?

Yes.

And my research partner, Mike Bates, has a question.

One thing we've -- and you guys have given some commentary on this in the past -- is that your conservation and DSM expenses, which we understand are recovered in your riders, it seems like you've said you expect the rate of increase to taper off here. Can you give a little bit of commentary on what you expect for that line item this year and going forward?

Well, we've had a very successful year, of course, this past year with DSM and conservation. It reflected a bigger step than in prior years. We finished the year about 1.3% savings, for example, in Minnesota. We do expect this coming year to be about the same. However, there will be probably some additional programs that we'll see in other jurisdictions. So what we'll see is probably an increase this year, but it will not be as significant as we saw from 2009 to 2010.

I think the one thing to keep in mind too is that the bar increases for us and the incentive mechanisms that come with that do as well. So very much a part of our business. I think it's the reason why customer satisfaction is high, it's a good deal, and I think our customers appreciate it. But every year the challenge gets a little bit greater.

The bar gets raised.

Sure, thank you.

At this time I'm showing no further questions in the queue. I would like to turn the call back over to Dave Sparby for any closing comments.

All right. Well I want to thank everyone for participating in the call this morning. If there are any follow-up questions, please call Paul Johnson or any member of our IR team.

Thank you. Ladies and gentlemen, this does conclude the Xcel Energy fourth-quarter 2010 earnings conference call. If you would like to listen to the replay of this conference you may do so by dialing either 303-590-3030 or 1-800-406-7325. You will need to enter the access code of 439-5381. Those telephone numbers once again are 303-590-3030 or 1-800-406-7325 with the access code of 439-5381. Again we do thank you for your participation on today's call. You may now disconnect your lines at this time.