埃克西爾能源 (XEL) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Xcel Energy second quarter 2014 earnings conference call. During the presentation all parties will be in a listen only mode. Following the presentation there will be a question and answer session and instructions will be given at that time.

(Operator Instructions)

As reminder this call is recorded today, July 31, 2014. I would now like to turn the conference over to Paul Johnson, VP of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Xcel Energy's 2014 second quarter earnings conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer, Teresa Madden, Senior Vice President and Chief Financial Officer, Dave Sparby, Senior Vice President, Group President and President and CEO NSP Minnesota, Scott Wilensky, Senior Vice President and General Counsel, George Tyson, Senior Vice President and Treasurer, and Jeff Savage, Vice President and Controller.

This morning we will view our 2014 second quarter results, update you on recent business and regulatory for developments, and reiterate our 2014 guidance. Slides that accompany today's call are available on our webpage. In addition, we will post a video on our website of Teresa Madden summarizing our financial results. As a reminder, some of the comments during today's conference call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our filings with the SEC. I will now turn the call over to Ben.

Thank you, Paul, and good morning. Let me start by highlighting a few of the key takeaways from the quarter. And Teresa will provide more detail on some of these items. Overall, we had another solid quarter with earnings of $0.39 per share, compared with $0.40 per share last year. It is important to recognize that last year's results included a positive weather benefit of $0.03 per share, while this year's weather was relatively normal for the quarter. On year-to-date basis we are $0.03 per share ahead of last year and expect to deliver ongoing earnings within our guidance range for the 10th consecutive year. Our guidance range is based on several key assumptions as described in our earnings release including constructive outcomes in our regulatory proceedings.

Our quarterly results benefited from better than expected sales growth for the quarter. On a year-to-date basis weather adjusted electric sales increased 1.7%, and weather adjusted firm natural gas sales increased 5%. While we're hesitant call this a trend, it is certainly very positive as it is the third quarter in a row in which weather adjusted sales have exceeded expectations. In the second quarter we completed our after market equity program and we have now issued about $175 million of equity in 2014. I'm very pleased to report that we no longer anticipate issuing any additional equity over the next five-years beyond the normal issuances associated with our dividend reinvestment programs and benefit plans.

This change in assumption is driven by our strong balance sheet and better than projected cash flows. There are no material changes to our capital expenditures assumptions over the five-year period. As you know, in December we announced our plans to form a transco. Our objective is to optimize our transmission investment as the FIRC rules and market opportunities continue to evolve. So, this spring, in preparation to participate in the MISO and SPP transmission competitive bidding processes, we created two transmission subsidiaries. We formed the Xcel Energy Transmission Development Company, which will compete for the first set of transmission projects expected to be proposed in MISO south.

We also created the Xcel Energy Southwest Transmission Company, which will compete for transmission projects in SPP. We expect SPP to release the first set of competitive transmission projects for bid in 2015. We're planning to make federal and state regulatory filings related to the transco's in the third quarter of 2014, and we hope to have these regulatory proceedings resolved in 2015.

Strategically, the formation of the transco's will complement our existing transmission business, which is expected to spend $4.5 billion over the next five-years. While there may be some opportunities to transfer existing assets into our transco's, you should expect that the most of the planned transmission spend over the next five-years will be made at the operating Company level. We will continue take advantage of the right of first refusal and incumbency status we have in many of our states, while at the same time expanding our incremental transmission investment opportunities through our transco operations. Bottom line, we have a great track record as a proven industry leader in transmission in terms of operation, development and construction, and we are positioned to continue to have success as the market evolves.

Finally, I would like to wrap up my comments by discussing environmental policy. The EPA recently issued its proposed greenhouse gas rule, which requires states to develop plans to reduce greenhouse gas emissions from existing power plants by 30% by 2030, however, the EPA specific state reduction targets vary significantly, with certain state targets being very aggressive. For example, some of our states would be required to make reductions much greater than 30%. While incremental investment opportunities could arise from the more stringent EPA regulations, we are concerned that the rule does not give sufficient credit to actions taken prior to 2012. Over the last decade we've implemented significant clean energy programs that have reduced our emissions.

Our proactive actions to add renewables, retire inefficient coal plants, add new natural gas generation, and add DSM have allowed us to successfully reduce our carbon emissions nearly 20% since 2005. Further we're on track to reduce carbon emissions by 30% by 2020. So what we need to do is make sure our customers receive full-value for these initiatives and investments. The EPA will take public comment on the proposed rule and final rule is expected to be issued in 2015. We plan to continue to work constructively with the EPA and state policymakers to shape and implement the best final rule and state plans for our customers and the Company. With that, I will turn it over to Teresa.

Thanks, Ben, and good morning. We're pleased to report another solid quarter with earnings of $0.39 per share compared with 2013 second quarter earnings of $0.40 per share. The biggest driver of the difference was weather. 2013 second-quarter results included a positive weather impact of just over $0.03 per share compared with relatively normal weather in 2014.

Other drivers included improved electric and gas margins resulting from rate filings in several jurisdictions, and better-than-expected weather adjusted sales. We also experienced higher O&M expenses, property taxes, and depreciation expense. These cost increases were expected and are consistent with our financial plan.

Let me start by providing an update on sales and the economies in our local service territories. Once again sales growth was stronger than expected for the quarter. Normally we discuss quarterly results, however, I'm going to focus on year-to-date sales as the longer timeframe is more indicative of a potential trend. Our year-to-date weather adjusted retail electric sales increased 1.7% and firm natural gas sales increased 5%. While growth was favorable across the board, it varied by operating company. Beginning with SPS, year-to-date weather adjusted retail electric sales increased 3.6%. Largely driven by growth in the C&I class, although we also saw strong residential growth.

We continue to experience the positive impact from oil and gas exploration and production expansion in the southeastern New Mexico Permian Basin area. Additional load growth in ethanol production and uranium enrichment also contributed to the higher sales. Year-to-date weather adjusted retail sales at NSP-Wisconsin increased 3.2%. Large C&I sales were strong primarily due to increased load from one of our larger customers whose was operating their pipeline at reduced capacity in the first two quarters of 2013, but returned to full capacity in 2014. Customer growth, combined with slightly increasing use per customer, drove residential sales.

Year-to-date weather adjusted retail sales at PSCo increased 1.2%, and were primarily attributable to customer growth in the residential sector and higher average use in the small C&I class. In addition, two new food manufacturing companies, and improvement in the energy sector, have fueled gains in the large C&I class. Finally, year-to-date weather adjusted retail sales at NSP-Minnesota increased 0.8%. The higher sales were driven by growth in the number of customers, increased use per customer, in both the residential and the small C&I classes and the absence of storms that caused customer outages in 2013.

Economic conditions are generally stronger across the Xcel Energy region compared with the nation as a whole. The consolidated unemployment rate in our service territory of 4.8% remains well below the national average of 6.3%. In addition, the number of jobs in the Xcel Energy region grew 2.3% for the quarter, compared with 1.8% for the nation. While we are encouraged by the better-than-expected sales, it is still too early to declare this a trend. We continue to project weather adjusted sales growth of about 1% for 2014, which is below the 1.7% growth we've experienced year-to-date.

Turning more specifically to the second quarter earnings. Electric margin increased $48 million for the quarter. Key drivers included: implementation of final and interim rates which increased margin by $38 million, non-fuel riders increased margin by $17 million, and stronger than anticipated weather adjusted sales increased margin by $7 million. These positive factors were partially offset by an unfavorable quarterly weather comparison, the recognition of the reserve for a potential customer refund at PSCo, as well as other items. The reserve for a customer refund highlights the success of the 2012 three-year rate plan we implemented in Colorado. Over the last three years we have earned, or are projected to earn, above our authorized return in our PSCo electric business. Clearly this demonstrate the advantages of a multi-year plan, and supports our strategy of implementing multi-year rate plans in other jurisdictions.

Turning to the natural gas side of the business, margin increased by $6 million. This is largely due to rate increases and weather adjusted sales growth partially offset by unfavorable weather impacts. O&M expenses increased $23 million or 4.1%, primarily driven by higher nuclear costs. As we discussed last quarter, this deviation does not represent our planned run rate for the year. The year-to-date deviation is skewed to the timing of O&M expenses in 2013.

This is primarily due to the extended outage at our Monticello nuclear plant as part of the life extension and power uprate project, which was completed with the plant coming back online in the summer of 2013. As a reminder, nuclear outage costs are deferred during the outage and then amortized over the following 18 to 24 months. In addition, our O&M costs were at their highest level in the third and fourth quarters of 2013.

Following the positive 2013 summer weather earnings impact, we decided to increase our investment in the system in the latter part of the year, which served to increase O&M in the third and fourth quarters of 2013. As a result, we continue to expect our 2014 O&M expenses will increase 2% to 3%, consistent with our original guidance assumption. Finally, other taxes increased about $14 million or almost 14%, largely driven by higher property taxes in Minnesota and Colorado.

Next I will comment on several regulatory proceedings. Additional details are included in our earnings release. We recently filed rebuttal testimony in our Minnesota electric case and lowered our request by approximately $23 million in 2014, and $3.5 million in 2015. The revised request includes our updated sales forecast, which reflects the better than expected sales we have experienced in Minnesota. We also included a proposal to true-up sales based on weather adjusted results at the end of the year. In addition, we also updated our property tax forecast and included a proposal to true-up actual results at year-end.

We think these proposals address two of the more significant adjustments recommended by the Department of Commerce. Key dates include: Surrebuttal testimony is due August 4, the ALJ report is scheduled for December, and a final decision in this case is expected in March of 2015. In early July, the Department of Commerce filed their testimony in the Monticello Prudence review and recommended that this allowance of approximately $72 million on a Minnesota jurisdictional basis. This equates to a total amount of $94 million for NSP-Minnesota. We disagree with the departments assessment and continue to believe our investment was prudent. While completing the project took longer and cost more than we initially projected, similar projects and other nuclear plants across the country demonstrate that our experience was not unique. The project was in many ways more complicated and difficult then new construction.

Regardless, it was essentially that this work be done right and we believe we made reasonable and prudent decisions over the five-year span of the project. We had a largely rebuilt nuclear power plant that will provide our customers with carbon free low-cost power for the next 20 years. We look forward to the opportunity to provide additional support for the project and to address issues raised by the Department of Commerce and any other interveners in our rebuttal testimony on August 26. Other key dates on the schedule include: Surrebuttal testimony is due September 19, the ALJ report is scheduled for December, and a final decision on the Monticello Prudence review is expected in March of 2015. The results from the final decision will be implemented in the Minnesota rate case decision. We remain confident that we will reach a constructive outcome in both in the Minnesota rate case and the Monticello Prudence review.

In June, we filed a Colorado electric rate case seeking an increase in annual revenue of approximately $138 million or 4.9%, and the initiation of a clean-air clean-jobs investment rider that would cover 2016 and 2017. Our objective is to establish a multi-year regulatory plan that provides certainty for PSCo and its customers. We believe this plan would accomplish that goal. It is early in the process, so a procedural schedule hasn't been established, however, we anticipate a Commission decision and implementation of final rates in the first quarter of 2015.

In Texas we requested a net increase in electric rates of $48.1 million or 5.3%. We are in settlement discussions with various parties and hope to reach an agreement soon. During the quarter we also filed rate cases in Wisconsin and South Dakota. Similar to Colorado, it is still fairly early in the processes, so there isn't much to report. Details on both of these cases are included in the earnings release.

It has been a busy regulatory schedule for us, but these rate cases should be resolved by year-end or in the first quarter of next year, and will provide us with regulatory certainty in 2015 and beyond.

This morning we are reaffirming our 2014 ongoing earnings guidance of $1.90 to $2.05 per share. The guidance range is based on several key assumptions, as described in our earnings release, including constructive outcomes in our regulatory proceedings. With that I'll wrap up my comments.

With six months completed, we're $0.03 per share ahead of last year and on track to deliver earnings within our guidance range for the 10th consecutive year. We continue to experience better-than-expected sales growth with year-to-date weather adjusted retail electric sales growth of 1.7%, and weather adjusted firm natural gas sales growth of 5%. We have completed our at-the-market equity program and we don't anticipate issuing any incremental equity beyond our dividend reinvestment program, and to fund benefit programs over the next five years. This is based on our current capital expenditure plan. We continue to make progress on the regulatory front, and expect to reach constructive outcomes in our major jurisdictions. We continue to expect 2014 O&M expense to grow 2% to 3% from last year. Consistent with our original guidance assumption.

And finally, we are well-positioned to deliver on our 2014 earnings guidance and long-term financial objectives of growing earnings and/or dividends 4% to 6% annually. Operator we will now take questions.

Thank you.

(Operator Instructions)

Michael Weinstein, UBS

Hi, I was wondering if you could expand more on the independent transco plan. Which regions do you think you have the most opportunities, and also what kind of competitive advantage you might have outside of your own footprint?

The regions -- thanks for the question. This is Ben. The regions we compete in would be MISO and SPP. I think both regions offer great opportunities for us. We've got a history of delivering large projects -- and what comes to mind by say that is CapX2020.

When you think about that, that is a project where we have multiple partners, we collaborated with those partners, and put together what has turned out to be an extremely successful transmission build in the upper Midwest. We've got that advantage I think of being able to collaborate. We've got a track record of delivering transmission projects at a price point that I haven't seen anybody else match. And we're executing on time, so we've got a lot of experience, in fact, I believe we're the largest builder of 345 lines in the nation. I think you put all that together and we're positioned well to win in a competitive environment. Did I get your question answered right?

Yes, thanks. One other question -- and this is more related to the Colorado rate case. I'm just curious about -- given economic conditions and your view of the future, I realize that you're in discussions right now, so I don't know what you can say, but what is more important? A multi-year settlement that keeps things steady for many years or trackers?

Different spokes all go to the center of the wheel. The important thing is the results. You probably could do it with either. To be quite honest with you.

Okay. Thank you very much.

Travis Miller, Morningstar

Good morning.

Hi Travis.

Staying on the transco subject here. I was wondering what your thoughts are in terms of long-term investment projects and potential growth and even the viability of a transco if FIRC comes back with the rate cuts that perhaps they've targeted, or suggest, in the northeast. And then, obviously, the complaints in MISO. What are your thoughts on if we get 100, 150 basis point cuts in FIRC are we using in terms of the viability and growth opportunities in transco?

I think, Travis, clearly, the lower the allowed ROEs, the more of a damper it puts on the enthusiasm to build transmission. That said, it doesn't surprise us that we're starting to see those ROEs go down, and I think in a competitive environment they might go down for other reasons. The advantage of having a transco is it allows you to look at a larger footprint. It allows you to more efficiently collaborate with other partners and it gives you much more financial flexibility. So I think you're going to see that trend perhaps continue, hopefully not as severe as you mentioned, but I don't think that dampens our desire to want to have a transco

Okay. Yes. That's great. On that competition side that you mentioned, how much competition do you expect here? We've heard a couple of companies mention this. Especially in that MISO, SPP region. Are you thinking this is a three-person -- three horse race, or is it a five or seven?

Everybody has it transco, and everybody wants to build transmission, so I think it will be very competitive. Many more parties than three.

Great. I appreciate the thoughts.

Thank you.

(Operator Instructions).

Michael Lapides, Goldman Sachs

Congratulations on a good quarter. Couple of questions. First of all, you commented about the potential for moving some of the existing assets into a transco. I'm just curious if you could put some numbers around that in terms of size or scale of existing rate base that you would move out of the state jurisdiction and into a FIRC jurisdiction subsidiary?

Michael, we're really in early days thinking about those kind of opportunities. Let's make it clear that they would require state regulatory approval, and as we know, that can be difficult to achieve. Not impossible, particularly if you can demonstrate customer value to our regulators, which I think in some circumstances we can. I can't really give you a number. The guidance that we said on the call, and I would continue to stick with that, is you should think of the $4.5 billion that we're going to spend, most of it would be at the operating company level. I think we have some incremental opportunities through the transco that would probably be in the latter part of our five-year forecast, and that would be on top of the $4.5 billion. And then of course, in the five years that follows, I think transco would play a more predominant role.

Okay. Changing topics a little bit and thinking longer-term, not necessarily the next two to three years, but maybe the next five to ten, when you look across your system and across your states, which of your jurisdictions will have the greatest need for potential new or incremental renewable assets in order to meet the state renewable standards? And which ones have less of a need?

We're actually in very good shape to meet the state renewable standards. We're ahead of the game. Significantly ahead of the game, but maybe what you are referring to is with the EPA rules will we have to do more. Is that what you are driving at?

No, I'm really thinking about -- it's funny everyone generally thinks about that numerator when they're thinking about renewable megawatt hours. They forget that a lot of these are set on a percent of sales. So if you're seeing sales recovery a little bit greater than what was in the forecast, the denominator changes and then it may impact what is actually needed going forward. I'm thinking about the bigger picture and really trying to think five and ten years down the road of where the states you're in could see a need for incremental or renewable RFPs.

Well, I think -- let me just give you my take on it. Clearly states could increase their renewable standards. But where we spend today, even with sales picking up, I don't see that moving the needle very much. I think that continues to put us in the position where we can add renewables without the pressure to do it now. That means we can be more choosy, and we can bring them on at better price points for our customers. And that's what we have been doing over the last decade. It has really worked well for us. We would like to see it continue, but I don't think we're going to be forced into it because of a state renewable standard.

And finally, once more an industry question, but also specifically for your assets, how do you think about the long-term growth rate in O&M for nuclear power plants relative to your total long-term O&M growth rate targets for the consolidated entity?

That's a really good question. Obviously, it's been pretty significant over the last five years. We'd like to think it's going to flatten out. I think a lot of that will depend on additional regulations that might come out. If I were going to give you a rough estimate, I would say that nuclear O&M is going to be hard-pressed to be as flat as we anticipate the rest of our business. The degree of which I couldn't really give you any particular insight at this point.

Okay. And any update on your long-term O&M targets?

Yes. We're going to continue to push the O&M down. You know what our targets are for the next five years. I think ultimately you have to have your O&M growth match your sales growth. I continue to think that is going to be, despite the pick up, relatively flat and that's where we want to see our O&M growth you. Back to the nuclear side, I think it's important to recognize that in a carbon constrained world these nuclear plants are extremely valuable. If they require a bit more O&M than the rest of our business, I still think they are very good value propositions for our customers.

Got it. Thank you. Much appreciated. Appreciate you taking my call.

Thank you.

David Paz, Wolfe Research.

Hi David.

Good morning, how are you?

Good.

Now that you don't need the $700 million of external equity over the five-year plan, how does the mix in your financing plan change? That is what percentage from CFO, from [UDEP], and from DRIP?

We anticipate, in terms of we had previously said, from the DRIP and the benefit plan, that was about $350 million. Just a slight increase to $370 million. And the remainder would be just funded through closing Company debt. You can just do that translation.

I would say though that the remaining piece that we were talking about --you said $700 million, and we frankly completed $175 million of that in the first part of this year. So we just finished up our ATM program. It's more in the $500 million range.

Understood. Okay.

And, David, about $130 million of incremental cash from operation to offset that.

Got it. Okay. I think you said in your prepared remarks that your current five-year capital plan is unchanged, or at least, is not materially changed. Is that correct, and if so, when do you expect to update your capital plan?

Yes. That is correct. We're basically the five-year around $14 billion. It will be later this year. Generally we do it in our third quarter call, but we'll continue to monitor that, but that would be the earliest that we would expect.

And given the discussion earlier on transco, is it fair to say that when you roll forward one year that you probably can maintain that $14 billion? Or at least around that?

Yes. It's going to be in that area code.

Great. Thank you so much.

Thank you.

(Operator Instructions)

Thank you all for participating in our earnings call. Please contact Paul Johnson and the IR team if you have any following questions.

Thank you. Ladies and gentlemen, that will conclude the conference call for today. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030 or 1-800-406 1-800-406-7325. You will need to enter the access code of 4687079. Those telephone numbers are once again are 303-590-3030 or 1-800-406-7325 with an access code of 4687079. Again, we do thank you for your participation on today's call. You may now disconnect your lines at this time.