All improvement: Xcel Energy's CEO Discusses Q4 2013 Results

Executives

Paul Johnson – VP, IR

Ben Fowke – Chairman, President and CEO

Teresa Madden – SVP and CFO

Analysts

Paul Freemont – Jefferies

Travis Miller – Morningstar Securities Research

Ali Agha – SunTrust

Greg Gordon – ISI Group

Paul Patterson – Glenrock Associates

Julien Dumoulin-Smith – UBS

Andy Levy – Evan Capital Advisors

Xcel Energy, Inc. (XCJ) Q4 2013 Earnings Call January 30, 2014 11:00 AM ET

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2014 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead.

Paul Johnson

Good morning and welcome to Xcel Energy’s 2013 yearend earnings release 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 of NSP- Minnesota; Scott Wilensky, Senior Vice President and General Counsel; George Tyson, Vice President and Treasurer; and Jeff Savage, Vice President and Controller.

This morning, we will review our 2013 results and discuss our 2014 priorities, update you on recent business and regulatory developments, and reiterate our 2014 earnings guidance. Slides that accompany today’s conference call available on our webpage. In addition, we will post a brief video of Teresa Madden summarizing our financial results on our website.

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.

Today’s press release refers to both ongoing and GAAP earnings. 2013 GAAP earnings of $1.91 per share included a $0.04 per share charge as a result of 2013 FERC decision regarding fuel cost, fuel and cost allocation at SPS. These issues relate to complaint by parties dating back to 2004 and 2006. While we are pursuing reconsideration of these orders, they resulted in a refund liability for prior periods and consequently we took a $36 million pretax charge during the third quarter of 2013.

2012 GAAP earning of $1.85 per share include a $0.03 per share tax benefit associated with federal subsidies for prescription drugs plan that were previously expensed. Both items are excluded from ongoing earnings.

Management believes ongoing earnings provide a more meaningful comparison as representative of Xcel Energy’s fundamental core earnings power. As a result our comments will focused on 2013 ongoing earnings of $1.95 per share compared with 2012 ongoing earnings of $1.82 per share.

I’ll now turn the call over to Ben Fowke.

Ben Fowke

Thank you, Paul and good morning. I am pleased to announce another successful year at Xcel Energy. In addition to delivering our on annual financial objectives, we executed on several initiatives that positioned Xcel Energy for continued financial and operational success in the years to come.

Let me start by discussing some of our 2013 highlights. Once again, we delivered strong financial results. Ongoing earnings grew over 7% to $1.95 per share; this marks the 9th consecutive year we’ve met or exceeding our earnings guidance. In the fourth consecutive year, we delivered earnings in the upper half of our guidance range. We also raised our annual divided $0.04 per share or 4%. We completed rate cases in several jurisdictions which helped us to achieve our financial objectives in 2013.

Looking back on 2013, we are especially proud of the commitment to customer that our employees demonstrated again and again. A series of severe weather events including blizzards, ice storms, thunder storms and floods brought out the company’s best effort. We also completed several major construction projects including the effort to extend the life of Monticello nuclear plant and we placed steam generated at our Prairie Island nuclear plant. Our Cherokee 3 coal-fired unit is back in service after sustaining major damage in 2011. We brought Jones 4 online in Texas and in time for higher summer load and to help serve a continued industrial growth were seen in the region. Colorado, we made great progress on the Clean Air Clean Jobs Act project including the Cherokee combined cycle plant and adding FCRs and scrubbers upon as well as FCRs at Hagen [ph]. Overall these projects remain on time and on budget. Another major focus in 2013 was our ongoing work to increase the strength and reliability of the electric grid.

We are making significant investments to ensure the system is ready to accommodate renewable energy, interact with new technologies and withstand major weather events. Strong energy grid ensures that we are able to meet the growing and changing energy needs of our customers.

We are set to increase our future wind production by 40%, given the current price of wind energy this is an excellent way to protect our customers from rising fuel costs. The American Wind Energy Association recognize their efforts to promote wind production when they named us The Utility of the year, and we obviously appreciate that designation but we are particularly satisfied that we are determined how to make wind energy an affordable option for customers. In another effort that leverages our environmental leadership for customer gain, we were able to announce in 2013 that we are on track to exceed our goal of reducing carbon emissions from our power plants 20% by 2020 compared with 2005 levels.

We are well-positioned on this front and part because we acted early and converting growth furbishing power plants and because we have such a solid portfolio of renewable energy sources. With the successful 2013 behind us, we’re ready to make 2014 another good year. Our focus will be on ensuring that Xcel Energy is the energy provider that our customers prefer and value. We have initiatives underway to achieve productivity improvements through technology and through leveraged employee engagement. We will continue our efforts to strengthen the energy grid build our portfolio renewable energy resources and reduced emissions from our plants.

Part of our effort to strengthen the grid, we plan to invest $4.5 billion on transmission projects over the next five years. We have proven that we can design site and construct transmission for less than our competitors. And we see significant opportunities right in our backyard. We believe (inaudible) and Transco will provide multiple benefits including enabling increased flexibility to support our operations in the post per quarter 1000 transmission investment environment. Depending on regulatory treatment, we believe that our plan project in the Southwest Power Pool might fit nicely into a Transco and necessary regulatory filings will be submitted later this year, and we hope to have approvals by late 2014 or early 2015.

Another key priority for us to deliver constructive outcomes in our regulatory proceeding, and to improve the overall regulatory construct. In 2014, we hope to put in place multiyear rate plans in Minnesota, Colorado, North Dakota and potentially other jurisdiction, which will provide revenue certainty for shareholders, and cost certainty for our customers. Achievement of our 2014 priorities will allow us to deliver on our objectives and provide an attractive total returns to our shareholders.

Now, I’ll turn the call over to Teresa.

Teresa Madden

Thanks, Ben and good morning. As you can see from our earnings release, we had another strong year on a consolidated basis 2013 on off going earnings grew $0.13 per share or 7% to $1.95. This resulted in a consolidated ROE of 10.5% on an going basis. The improvement in profitability was primarily the result of new and interim rate being implemented across several jurisdiction, positive weather and lower interest expense. These competitive factors were partially offset by higher O&M and depreciation expenses. More specifically, I wanted to provide you with some insight into several drivers for the year.

First weather was very favorable in 2013, increasing earnings almost $0.11 per share compared to normal and $0.06 share compared to 2012. Sales growth was slightly stronger than expected for 2013. Weather adjusted retail electric sales increased fourth tend of a percent and firm natural gas sales increased 3.8%. However sales growth varied by operating company. On a weather adjusted basis our electric sales growth by OpCo was NSP-Wisconsin eight tenth of a percent, PSCo 1%, SPS 1.7% and NSP-Minnesota declined eight tenth of a percent. The economies in our service territories continue to improve. Overall compared to the national average, we had higher job growth and lower unemployment in our service territory. Finally, at SPS we sold two small segments of transmission lines that were no longer needed to support our customers. As a result, we recognized a $0.02 per share gain on the transaction after sharing with customers.

Next, I will provide some detail on the financial results of each of our operating companies. At NSP-Minnesota ongoing earnings grew 13% to $0.79 per share primarily due to new rates going into a set in Minnesota and South Dakota and intermediaries in North Dakota. Cooling winter weather and lower interest charges also served to improve 2013 earnings. Even with the benefit of positive weather at NSP-Minnesota our earns 2013 ROE of 9.2% was well below our authorized level. We have filed and proposed multiyear rate plan in the Minnesota in an effort to close this gap. Earnings at PSCo increased $0.01 per share in 2013. The primary drivers for higher electrical and natural gas rates, cooler weather and lower interest charges. These positive factors were partially offset by higher depreciation, O&M and customer refunds related to the 2013 electric earnings test. Similar to 2012 in Colorado, we over earned our authorized electric ROE of 10%. As a result, we recognized a refund obligation the customer. After accounting for this refund as well as the under earnings in our natural gas business, PSCo earned a consolidated ROE of approximately 9.7% in 2013. At SPS earnings increased $0.01 per share to $0.23 for the year. A positive impact in the electric rate increase in Texas and the sale of transmission assets to Sharyland were partially offset by higher depreciation expense. Our ongoing ROE with 9% at SPS.

We continue to make progress on regulatory front hitting writer put in place and the use of the forward test gear in New Mexico. Texas and Mexico offers substantial organic growth opportunities due to the continued expansion of the ++oil and gas industry located within our service territory. As a result, we’ve identified certain attractive infrastructure investments that will help develop this part of the country. Getting the rules in place to ensure timely recovery as well as establishing an alternative investment structure that Ben discussed will be an important part of our future. We’ve made great progress at SPS and we’re excited about the opportunities ahead.

Finally earnings in NSP- Wisconsin increased $0.02 as a result of higher electrical and natural gas rates, cooler winter weather partially offset by higher O&M and depreciation. Our earned ROE at NSP- Wisconsin was 10.6% slightly higher than our overall authorized level.

I’ll now comment on several of our pending regulatory proceedings. Additional details related to these and other proceedings are included in today’s press release. As you may recall, last November, we filed a two year electric rate case in Minnesota. In December, the Minnesota commission unanimously approved our requested file and grant us $127 million or approximately 6% interim rate entry which went into effect earlier this month. The commission also agreed that our request to accelerate the sealed radical depreciation reserve amortization was permissible. The procedure of scheduled for the Minnesota case was established this week and is included in the earnings release. Intervening testimony is due in June, hearings are scheduled for August, the ALJ report was due in December and a final decision in this case is expected in the first quarter of 2015.

In our North Dakota electric rate case, we reached a comprehensive multiyear settlement agreement with the state which includes a four year rate plan with 5% annual increases in retail revenues for the first three years, and no rate increase in the final year. The settlement also includes a gradually increasing ROE during this multiyear period. Hearings of the settlement were held last week and a final decision is expected from the North Dakota Commission this quarter. At SPS, our New Mexico requested $32.5 million rate increase pending commission decision. On January 23, the sharing examiner provided recommended decision which included an ROE of 9.73% and our requested equity ratio of 53.9%. The recommendation did does include a revenue requirement calculation but our initial analysis indicates a reduction to our base rate request of about $6 million which results in a base rate increase of approximately $15 million. The recommended decision did not address the renewable rate. A commission decision is expected in April. In Texas, we recently filed for a net increase in electric rates of $52.7 million or 5.8%. We have requested implementation of interim rates of $32.6 million effective on March 3. Intervening Testimony is due in May and hearings are planned for June. We anticipate a final decision and the implementation of final rates in the third quarter.

Turning to our financial plans, today’s press release summarizes our five year financing plans related to our $14 billion capital expenditure forecast. We plan to issue the following first mortgage bonds during the first half of the year. Approximately 300 million at both NSP Minnesota and PSCo approximately 115 million at SPS and approximately 100 million at NSP- Wisconsin. We also have plans to issue equity during the next five years. While we don’t plan to provide you with the specific timing of the equity issuance, I will point out that our CapEx program is front and loaded, and we anticipate our equity issuance will likely be similar.

With that I will wrap up. Once again, we delivered 2013 earnings at the upper end of our guidance range. We are proud of our track record of generating the financial results that our investors’ expect. Operationally, we continue to provide our customers with a high level of service even when faced with several severe weather events. We continue to make important investments in our system that positioned our company for long-term operational success, and will allow us to provide strong customer value for many decades to come. We are positioned to continue to deliver attractive shareholder returns well into the future. In summary, we are proud of our 2013 achievements and look forward to updating you on future successes in 2014. This morning we are reaffirming our 2014 ongoing earnings guidance of $1.90 to $2.05 per share. Please note we’ve updated certain guidance assumptions to reflect 2013 actual results. Details of these changes can be found in today’s press release. In particular, we have revived our depreciation assumption to reflect our proposed moderation plan in the Minnesota rate case. When we originally issued our guidance assumptions in the third quarter, it was prior to the filing of the Minnesota rate case. So we requested a total then expected increase and depreciate and expense. And moderation plans is approved will reduce both revenue and depreciation expense for approximately $81 million but wouldn’t impact earnings per share. Therefore, this assumption change doesn’t impact our guidance outlook. So with that Kevin, we will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Paul Freemont with Jeffries. Please go ahead.

Paul Freemont – Jefferies

Yeah, I’m just trying to better understand the change in the depreciation guidance. If you look at your slide 7, it looks like you take the impact of customer bill of $127 million which I think is an interim rate relief at the $81 million and $16 million to get through a pretax impact on operating income of $224 million, so it looks from the slide as if the $81 million is incremental to the $127 million but that’s you said the opposite I think in terms of how should we think about it?

Teresa Madden

Well, if you started at the top at $274 million that’s the growth request and then we took out $81 million so that gets us to $193 million, so we have lowered the revenue back to notch but the bottom depreciation expense were also so we come to an net kind of cash more impact on the customer bill but the couple of those other items, but then we also lowered depreciation expense so we are basically lowering revenue and we are lowering depreciation expense what gets to that new and net $224 million

Paul Freemont – Jefferies

Okay so but– okay so for modeling purposes because your drivers don’t give the amount of great relief we should add or we can make an assumption of $127 million interim increase or whatever you think you are going to get in the case plus the AD right.

Teresa Madden

Exactly, correct.

Paul Freemont – Jefferies

Okay then second question I have is there looks like there is a liability that setup for a customer refund against the Sharyland gain of $7.6 million, over what time period is that money refunded?

Teresa Madden

It’s not determined but it will be probably likely in next year so they have just sent, we just reached that agreement with the Texas and New Mexico.

Paul Freemont – Jefferies

Okay and last question for me is what’s the approximate timing of your next Colorado electric rate filing?

Teresa Madden

Probably anticipate mid-year.

Operator

And our next question comes from the line Travis Miller. Please go ahead

Travis Miller – Morningstar Securities Research

Good morning, thanks. I was wondering if you could talk about the interest expense, obviously the some issues in 2013 that were very favorable relative to what you were deemed and you got you mentioned in terms of first half financing, what are your thoughts on how interest rate interest expense develops here in 2014?

Teresa Madden

In terms of what we had some replacement and particularly we no longer have any more 8% that was all basically retired and in 2013 so we would expect with our newer financing that we would be pretty comparable and we don’t expect to see such significant decline as we did between 2012 and 2013

Travis Miller – Morningstar Securities Research

Okay and that’s because you also got the incremental financing.

Teresa Madden

We do have the incremental but net-net it’s still beneficial.

Travis Miller – Morningstar Securities Research

Right, okay. And the second on the weather impact, could you break that down in terms of the revenue benefit and then what the higher costs related to the weather was in 2013?

Teresa Madden

Well the higher cost that would be difficult I can tell you in terms of the companies that would help you how the weather benefit went.

Travis Miller – Morningstar Securities Research

Sure, yeah, you put EPS obviously in there. I just want to know how that breaks down.

Ben Fowke

Travis, the hotness has been – the higher cost is directly attributable would be that the storms that we had that we could generally attribute to hotter or more volatile weather, but we have always been and we also always take the opportunity when we have weather to put – a favorable weather to put so more money back into maintenance and those sorts of things so we have a strong system going forwards. That’s a little bit harder to quantify.

Operator

Thank you. And our next question comes from the lines of Ali Agha with SunTrust. Please go ahead.

Ali Agha – SunTrust

Good morning.

Ben Fowke

Hi, Ali. How are you?

Teresa Madden

Hi, Ali.

Ali Agha – SunTrust

Couple of questions. One is on load growth. I see that you folks by the normalized, I still assuming 0.4% or so in 2014, however fourth quarter was up 1.1% and I know it’s just a quarter but are you seeing a pickup in load growth? Is there a sign of optimism there? Can you just elaborate a bit on that?

Ben Fowke

Ali, I’ll start it off and Teresa can add. I mean we did see a pickup in the quarter but I think you have to – we’re always pretty cautious about a quarter particularly a quarter that experienced some pretty volatile weather. Not only in total but how it occurred within the month and so you have to be little bit careful. However, it is a favorable trend, I step back and compared the quarter to the overall year and I think what we are seeing, we are continue to see SPS, NPS go do better than the north and that we don’t anticipate that trend will change into 2014. you break it out little bit further residential generally usage wise with a flat PSCo is flat with usage, every other jurisdiction declining in usage, however we are seeing customer addition again consistent with where we were pre-recession. So that’s a good sign. But you put it all together and it’s still results in fairly flat residential revenues. And on the C&I side again much more activity in the south and the west and not so much in the north.

Teresa Madden

No, I think you cover that well Ben and I will agree one quarter stopping other trend.

Ali Agha – SunTrust

Okay and then on the weather, I know we are early in the year but any sense of how much cushion if you will, this really cold January has given you guys as you are looking into 2014 right now?

Teresa Madden

Well, Ali, I would say in Minnesota it has been really cold but Colorado has some really warm days too so anybody likes the Bango game.

Ben Fowke

Yeah by the way Bill Branco, we have been following the New York forecast. I would agree with Teresa, it has been credible in Minnesota but pretty generally tempered in Colorado and so you get the benefit as we always talked about with a big portfolio of diversity and weather is part of that diversity. And looked a bit canceling each other out to Teresa point.

Teresa Madden

Right, maybe it’s slightly up but it’s not as much as everyone in Minnesota would think.

Ben Fowke

Our misery indicated here would –

Ali Agha – SunTrust

Right, we have been hearing about the Minnesota weather, but last year you had $0.11 of benefit versus normal, I am just thinking again given what you are seeing so far, are you comfortable that you can match that so that weather doesn’t become headwind for you this year?

Teresa Madden

I mean in terms of matching I mean it’s so early, things can change in weather and I think surely –

Ben Fowke

Our guidance as you know always assumed normal weather and that’s what you have to count on. Little bit of positive in a first month but the summer weighs on us as much heavily than winter generally so yeah we just have to see how that plays out. It is on $0.11 that’s for sure.

Teresa Madden

Yeah, that’s right.

Ali Agha – SunTrust

Right, and last question Ben or Teresa. Remind us again as you are looking at this Transco potential in the SPP region etcetera, was that baked into your long-term earnings growth guidance 4% to 6%. Does it move the needle further? Is it already in there? Can you just remind us how that fits into your outlook?

Ben Fowke

Ali, it will allow us to continue to potentially investment transmission and depending on how the rules actually play out in FERC 1000 board but this is – the book of business that we talked about at Analysts Day is really based upon what we have today, and we are just putting these things in place so several years down the road we can continue to be successful billing transmission as we already are, and it’s as I said and Teresa also said it, it’s another arrow in our quiver, and we need to have option because the future is always uncertain.

Ali Agha – SunTrust

That doesn’t cause you to go above 6% or so, it still keeps you in that 4% to 6% range as you look at it today?

Ben Fowke

I think today that would be the case right.

Operator

And our next question comes from the line of Greg Gordon with ISI Group. Please go ahead.

Greg Gordon – ISI Group

Hey, guys, how are you?

Ben Fowke

Hi, Greg.

Teresa Madden

HI, Greg

Greg Gordon – ISI Group

As I look at the capital expenditure forecast you played out that underlies the 4% to 6% average earnings for that place and I observe that it is so much front and loaded. A lot of that capital spent happens in the first couple of years and then sort of dramatic drops towards the backend. If you were to fully execute on all of those, all that spending in the first two year with the financing cost the equity as long as you are successful of your regulatory strategy, why wouldn’t it be possible for you earns towards the high end of the guidance range over the next few years?

Ben Fowke

Why wouldn’t it be possible is that what you asked?

Greg Gordon – ISI Group

Yes. I mean because you’ve got more capital, more rate based growth on the front end of the plan and the backend.

Teresa Madden

Well, I want to say in terms of exceeding it, we do have assumption around rate cases, they are still continue to be some regulatory lag in some of our jurisdiction, but we expect to see be in 4% to 6% growth range.

Greg Gordon – ISI Group

And then what makes you comfortable that the regulatory strategy implemented in Minnesota is going to drive a better outcome in the last case result, so far what you can point to in term of your dialogue with your – with the important counter parties in that case that gives you comfort you will be able to get most of it what you are asking for this time around.

Ben Fowke

Well, there is a lot of subjective and qualitative but I think I point to the fact that interim rates will approved and without a lot of controversy. I think that we are hearing qualitative way that’s quality of the data submission was very strong, the outreach efforts, the rate mitigation plan I think has been understood and I would say generally accepted by our stakeholders, they understand what we are doing and remember, Greg, we – while this – we are not asking for a five year plan, we’ve been talking to stakeholders what a five year plans looks like and they understand that it’s – the pace of the rate increases that we’ve asked for as we did things like extend a life of our nuclear plants for 20 years. It’s going to start the level off and so they understand there isn’t going to be trend forever.

Teresa Madden

I would just add to that the way we think about 2013, there were three significant things in that case that were in isolation which we believe have been resolved. And I mean with the Minnesota plant and the up rate the up rate is complete, the plant has been operating since then, the Cherokee plant, we have the catastrophic failure and that refurbishment is also complete, and then we have the sales forecast and request in terms of the actually decline I should say and we feel that we have much better forecasting that will do better on this case. So I think that those three things are behind us, and so we feel better about this case going forward.

Unidentified Company speaker

I’ll just add Greg as we talked on Investors Day, we are offering rate predictability, moderation, we have addressed the issue up front and the investments largely reflect our current regeneration which is benefit preference of our customers. So that’s why I think this case is different.

Operator

And our next question comes from the line of Paul Patterson with Glenrock Associates. Please go ahead