Teresa Madden - Senior Vice President and CFO
Dan Ford - Barclays Capital
Xcel Energy Inc. (XEL) Barclays Capital Energy-Power Conference September 12, 2013 1:45 PM ET
Dan Ford - Barclays Capital
All right. Our next presentation is Teresa Madden from Xcel Energy. She is going to take us through the Xcel story. So, Teresa.
Thanks, Dan. And again I just want to check everybody can hear me. I don’t know why they never make the stands for me as always you can see like the top of my head and I can’t see any of you. So we’ll go ahead off stand here. This is what Dan suggested. So if you can’t hear just speak up. I think we are okay right now. Are you guys okay. I think we are okay maybe we can leave it here if we want to take that long. So I’ll just start off with our standard disclosures in terms of our Safe Harbor.
Today I’ll be talking about forward-looking statements which will involve potentially future items and there could be differences between our actual outcome and our projected results and this should be read in conjunction with what we have in our SEC filings our 10-Ks and our 10-Qs. So quickly move beyond that and start focusing in terms of what I like to talk about today.
Our utility we believe we are clearly a high quality utility that time has had a strong value proposition it’s very straight forward. I’ll hit the key highlights of it as we walk through the presentation today such as starting with the basics we’re a fully regulated national gas and electricity, electric utility. We’ve had strong operational performance and I’ll talk about that operational performance in a few specific areas. We do think operational performance combined with these other things environmental leadership. We’ve been a proponent very active in our leadership and the environmental seen for a number of years going back to the mid 2000s and it proved to be successful for us as a company and for our customers and in terms of being proactive.
We’ve had and we continue to have diverse capital investment pipeline all of these coupled with constructive regulation. We think has been a formula for our overall success and delivering on our financial objectives. So with that just to backup. This is a slide I’m sure many of you seen just to make sure we are all grounded again fully regulated electric and gas utility Midwest utility. We operate in eight states for utilities. The two largest utilities NSP-Minn and Public Service at Colorado actually contribute to between 80% and 85% of our earnings on an annual basis.
Last couple of years is actually been PSCo that has provided a greater contribution. The 3.4 million electric customers, 1.9 million gas customers. We do get a lot of questions about in terms of the large footprint is that sort of extraction and towards our ability to operate. We would say the large footprint actually provides some basically some risk mitigation and on several fronts. Clearly the weather is different across our jurisdictions and Minnesota weather is very different than Texas weather. We see that as a risk mitigating factor customers basis are different in our jurisdiction and again different customer basis. The regulatory contracts are different. So we actually think that having the broader footprint provides an advantage in terms of risk mitigation. So those few areas that I talked about in terms of the first slide we reviewed I’m going to walk through the various attributes. This is actually our 2012 score card and that basically our annual incentive plan pays upon and you can see our score card very much as an operational focus.
We found that this sells well with our regulators and if you look just look at it the right and you can see we had very strong performance in terms of our outcome in 2012. And I’ll walk through the key ones actually where we achieved maximum. Again our premises if you have customers that are satisfied with your service that will lead ultimately to constructive regulation which will help us in terms of our regulatory request as we move forward returning our capital investment.
First is SAIDI which is our reliability measures you can see we’ve achieved at the maximum level in 2011 and 2012. We’ve had very strong performance in this area. The high priority for our company. This only goes through 2012. We did talk about just a brag on our company at our second quarter earnings call. We did have some very and severe storms in Minneapolis at the end of June. Half of our customer base about half 600,000 customers were out. We restored service to 90% of our customers within three days. It’s quite an operation. We do have some interesting videos that hopefully we will soon be posting and making public what it really takes to be able to effectively restore service for that they get an outage.
You are, you will are impound outage rate this is our planned performance you can see we think significant improvement in terms of the last several years again satisfied customers having our plans generating reliability of our service is the fundamentals in terms of our overall success in the regulatory environment. And then the last one in terms of the operations I want to talk about is OSHA which is safety. We were very focused not only our employee safety but public safety as well.
Several years ago we started a program called Journey to Zero and its really a culture change and we are very focused on having our operations and in addition our other employee embracing safety as just a way of life it’s the way we are going to work and it’s not only for you as an employee but watching your fellow employee as well. And we are seeing good results from this program. All of those things in terms of just lead into our customer satisfaction. We have high customer satisfaction for the last couple of years at a 93% level.
This is actually despite having a lot of rate cases pending and a lot of rate increases put into place. So again combination, good service, satisfied customers leading to constructive regulatory outcomes. So I’ll go to the next area very proud of our environmental leadership in terms of our track record on that for the ninth year we have been named by AWEA as the number one wind provider in the U.S. We have over well I should say just under 5000 megawatts of wind on our system and we are proposing to add pretty substantial more in terms of wind. I’ll talk about that in a future slide. We were very proactive and in terms of embracing the retrofit of our power plant much of it was completed in Minnesota starting and about the mid 2006 completed in 2010, 2011 timeframe. We are right in the middle of the Clean Air-Clean Jobs program in Colorado.
So we are very interested in that. All these activities I’ll just briefly you can see at the bottom of the page in terms of emissions reductions CO2, Sox as well as NOx. So we’ve have a very good performance in that. Also on the environmental if we turn to our conservation program a very effective and mature conservation programs where we’re paid incentive. You can see our improvement over the last five years and in 2012 basically avoiding over 900 gigawatts of additional generation. In 2012 across our major jurisdictions we actually were awarded incentives of over $80 million.
So this is a key piece of our business. Continuing on the wind theme. We are actually now proposing adding about 2000 megawatts of wind to our system. It’s a combination of PPAs as well as ownership. Earlier this year I started within Minnesota. We issued in RFP because we were understanding that it looks like wind prices were going to be coming down after the PTC was extended when Obama signed the new tax law which come out of that we are proposing at 400 megawatts of wind through PPA and 350 megawatts through ownership. Two different wind farms once in Minnesota once in North Dakota.
We are actually working through the regulatory process on that in fact comments came in on Monday and the ownership proposals in Minnesota and the department was very positive on that which we were glad to see. SPS 700 megawatts of wind being proposed. The cost of these PPAs because they can levelized I mean we are seeing rates about between $25 and $30 at KW. It’s very beneficial. We are not entering in these – into these to meet our renewable portfolio requirement. We were well on track to meet those without this, we just think as we look to the future we get good prices and especially if you think that gas prices are going up and depending where you think that’s going, we think we could save a substantial amount for our customers, really we think this is a good proposition.
And frankly that’s the technologies are lot better than it used to be, the towers of dollars of (inaudible) are greater and the capacity is at a much higher level than the old wind farms more around the 45% level versus early wind farms how much we own and help PPAs which was written a lower 30s. And frankly, we know how to run the system better too. We have some wind predictor models that are very helpful.
In all these are our PSCo I should say, actually this been updated with our recent filing that we made this week. And we’re actually now proposing 450 megawatts of wind, 200 they’ve already approved at the Colorado Commission and a 170 megawatts of solar. So, that’s changed slightly but still on the renewable front. And expect decisions later this year, that’s really key to make sure that we get moving on these projects particularly to meet the tax requirements in terms of the PTC.
These wind additions from the ownership perspective I’ll say I'm going to talk about capital in a minute are not in our current capital forecast. So, when we update later this year assuming we’re successful and the regulatory process will be adding that. And in terms of where this put us in terms of our energy mix just briefly to review, you can see 2005 quickly in terms of contrast to 2020 moving from a coal complimented about 56% down to 44%. But I think the key thing to look at is the 3% moving up to 20% in terms of our renewable portfolio.
We do think a mix between nuclear, coal, gas and other renewables is appropriate for our profile and we think that where we would like to be. The potential additional resource additions and this is more on the thermal side, I’ll just quickly touch on this. Out of our resource planning process, we’ll start with Minnesota early this year it was identified that up to an additional 500 megawatts were needed and this is really for capacity different than wind. And over the period, it’s really about 2016, 2017 through 2019. We do have a process where we issue an RFP parties bid in, we bid in as well. We bid in a proposal for adding three CTs one in Minnesota, two potential in North Dakota they’re kind of sequence like that. So, we have some potential spend with that. We expect to see this year Minnesota Commission decision in the first quarter.
Also, same thing in Colorado about 250 megawatts in terms of additional need going through that process we have an RFP process there as well. We bid in and to adding some CTs. There is a lot of competition particularly in this one, the resource need is actually being driven by some of our expiring PPAs. So, it will be interesting to see how this comes out. We expect decisions either later this year early into next year.
So discontinuing on the capital investment theme, the period the five year period 2013 through 2017, we’re planning $13 billion in terms of capital investment, that does not include any of the spend that I just discussed. So, that would be up and above that. To spend just a couple of highlights the peak year is actually right now in 2013 and I’ll just touch on what comprise – is comprised of that spend. In terms of generation, it’s about a quarter of it. Clean Air-Clean Jobs in Colorado which will complete – be completed by 2017 it’s required by the legislation that was approved in 2010. In our nuclear investments, we just recently completed the Monticello operate and life extension, we’re glad that, that plant is back on line. We operate recently 71 megawatts. We hadn’t received NRC approval for that piece yet to run the plant at that level. But it is operating at the 100% level at the approved level that we expect to get that later this year.
Next week, we’ll actually take our Prairie Island plant one of the units down for a same generator replacement, that will be completed by the end of the year. So, that’s the generation and transmission key projects are CapEx 20-20 which is for major transmission lines in Minnesota. On distribution, key projects are just really the overall infrastructure refresh and we have separated out, we have a ten-year pipeline integrity program which we have riders for in Colorado that we’re actively working on.
Now, turning to the regulatory environment, it’s been an active year and in terms of a cross charge restrictions we have an seven rate cases, three of them have been completed with Minnesota being the most recent in terms of completion. I’ll just briefly talk about Minnesota, how do we come out on that. We’ll have to be candid, we were disappointed how we came out. We are going to be filing a case and I’ll talk about the multi-year plan on my next slide. But I think we learned a lot and what we need to do as we go forward, there were some real specific issues, some of is with our plant operations, Monticello was concerned about our Sherco plant which actually had a catastrophic incident a failure I would say in 2011 and is now being completely fixed. And the Sherco plant is up and running just last week, it’s gone to the 100% level. So, we’re glad to have that behind us. So, hopefully that will not be an issue in our upcoming case.
The other cases, Colorado gas, I’ll just point out we’re waiting for the ALJ recommendation which is now projected to be in October. We do have interim rates in place there, North Dakota we also have interim rates in place, we gone through the hearing process. New Mexico, hearings next week. George gets to go to Santa Fe on Saturday to catch the flight for him. Wisconsin gas and electric, filing done, we’re expecting parties to file their positions in early October.
So, going back to Minnesota. In the middle of this year, the commission actually filed are basically released and filed I should say some criteria around if utilities want to file multi-years and parameters. And so, these are the key parameters up to three years in terms of a multi-year you could do two, three whatever you prefer after the first year and the first year should be a full blown rate case, the focus to be on capital additions. And we believe that will be advantages for us because what will be driving future rate increases are our capital addition.
ROE would be the same in terms of the three year period or two year period once it’s set it will stay there. So, those are the primary provisions. And we do think that, that is we will be filing just these three or we’ll be filing a multi-year whether it’s two or three, we haven’t decided that we’ll clearly be filing a multi-year rate case.
So, just to pack up in terms of our performance on our operations, our environmental leadership, our execution, our investments profile has really translated into strong financial performance we believe and starting with our dividend targets have been 2% to 4% for the last several years since 2005, it’s actually been 3.4% in terms of what we’ve achieved of our dividend growth. Our payout ratio is only 59% at this time. We think this does provide us a lot of flexibility as we go forward in terms of potentially increasing our dividend, I’ll say that’s what investors ask us lot about when you’re going to increase them.
And in terms of EPS growth, our targets been 5% to 7% also strong performance in terms of the past several years with our compound average growth rate just over 6%. We are on target, our guidance range for 2013 $1.84 to $1.95 we do see ourselves in that guidance range as we narrow to the end of the year.
So, just in terms of I will just briefly touch on we’re well aware that our stock is trading at a discount slightly even more discount to our peers and it has in the near term recent pass. But as a result of that, we think we have a strong track record of delivering on our performance, we think we have good value but we thought we would just point this out. And I mean that we’ll continue to deliver in terms of our overall financial objective.
So, in wrapping up, this is really just a repeat of where we started an information, high quality utility attractively priced particularly at our discount and we have very strong operational performance, very proud of our environmental leadership again we think it’s proved to be very beneficial to our customers as well as our investors. We continue to have a very diversified investment pipeline and talked about some of those things even new items that are coming up and we have a history of constructive regulation. I’ll say in terms of I think it’s important to probably reiterate and what we talked about in our second quarter earnings call because we do get a lot of questions about this. We have- had the growth rate at 5% to 7% in terms of our earnings per share. And we have always said sometime in the 2014 around there that we would expect that to taper off as our capital investment profile tapers off even with proposed addition of wind.
We did say in our 2013, in our second quarter call that after 2013 it will be more difficult for us to achieve that 7% the top end of the earnings growth rate. But we have flexibility with our dividend as we look forward is consistent with what we talked about we’ll be back to talking more about that later this year, our third quarter earnings call. We had [EEI] coming up as well as everyone else or we are going to have an analyst day in New York in the first week of December. So, more to come on that again track record of strong financial performance and that’s really our story. We are sticking to it. We try to be transparent and straight forward about it. So, that
Dan Ford - Barclays Capital
We have I think three minutes for questions [Question Inaudible].
Dan, you have to.
And Teresa you talked about the results in Minnesota and some lessons learned by the company about how you might approach the next rate filing. Could you expand on that some what exactly you think the commission wants to see in the upcoming case in Minnesota on the multiyear?
Well, let me say that commission, I already expand that to what are the parties want to see. Clearly in terms of what we provided we had a lot of data request and they want more information. I know, we think, we supplied a lot more information there. They really wanted to extend along the time period to evaluate that. So, as we’re preparing our [Form 10-K], we’re preparing a lot more detailed information that we’re just going to submit it in the initial filing. So, we are ready to go with that.
We do think certain of those issues that I mentioned that became its more contentious (inaudible) situation they are behind us. Sales was an issue basically we’ve projected a decrease of about 1.2% parties were at six-tenths of a percent about 50% of that. We weren’t able to enter into the record how we are tracking on our 2013 sales relative to that 1.2% decline we’re tracking very closely. We think that will position us well as we go forward several things drove that.
But I must say and we’ll have Monticello our prudence review and in conjunction with this stable investigation Monticello has written a certificate of need estimates back in the 2006, 2008 timeframe was about $320 million we came in at about $655 million but that wasn’t just like a big surprise. We’ve been talking about that as we went long several things drove that. Fukushima came along in there. We needed to refine our engineering estimates $320 million was not a cap. So, several things than that but really more detail, more specifically how we layer out I think it’s a real key factor. So, we’re preparing that way. Yes.
Teresa you have had some experience over the years with Ron Binz, who is now been, when he is at the Colorado Commission now nominated to go to FERC. Do you have any comment you want to make about him or what your dealings with him in the past and in particular, does that lead you to have a potential investment strategy if he gets accepted as Chairman of FERC?
We do have an experience with him. I mean, I even as a person well I’ll say he is a smart guy because I don’t have to testify before him and purchase our contracts and capital leases and he gets it quickly. And we found him very supportive. He helped in terms of Clean Air-Clean Jobs will that change our investment profile I don’t see that. But yeah he is a smart guy and he understands the industry. He has a lot of experience and we found him helpful.
Teresa I noted that your dividend growth is less than your earnings growth is that to design to bring the payout ratio down or where is the future dividend policy will be? These are going to match more earnings or it will be below earnings growth?
In terms of why we believe that’s a conservative strategy that we’ve taken up to now because we’ve had a very robust capital investment profile and we thought if we’re better served in terms of instead of increasing the dividend early and let us get through that and improve our cash flow position as we go through the regulatory process and we see that would be the appropriate time. So, potentially those two could be coming closer together but more to come on that later this year. All right. Well thank you.
Dan Ford - Barclays Capital
All right. Thank you very much Teresa.
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