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Xcel Energy Inc (NYSE:XEL)

Q3 2009 Earnings Call

October 29, 2009 11:00 AM ET

Executives

Paul Johnson - Managing Director, Investor Relations and Assistant Treasurer

Benjamin G.S. Fowke III - President and Chief Operating Officer

David M. Sparby - Chief Financial Officer

Scott Wilensky - Vice President - Regulatory and Resource Planning

Analysts

Paul Patterson - Glenrock Associates

Dan Jenkins - State of Wisconsin Investment Board

Andrew Levi - Incremental Capital

Operator

Good morning ladies and gentlemen and thank you for standing by. And welcome to the Xcel Energy Third Quarter 2009 Earnings Conference Call. At this time, all the participants are in a listen-only mode. And following the formal presentation instructions will be given for the question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded today, Thursday, October 29, 2009.

At this time, I would now like to turn the conference over to your host Paul Johnson, who is the Managing Director for Investor Relations and Assistant Treasurer. Sir, you may now begin.

Paul Johnson

Thank you and welcome to Xcel Energy's third quarter 2009 earnings release conference call. I'm Paul Johnson. With me today is Ben Fowke, President, Chief Operating Officer; Dave Sparby, Vice President, Chief Financial Officer; Teresa Madden, Vice President and Controller; Scott Wilensky, Vice President of Regulatory and Resource Planning and George Tyson, Vice President and Treasurer.

Today, we plan to cover our third quarter results and provide a business update. In addition, we'll provide additional information on our 2009 guidance.

Please note that there are slides that accompany the conference call which are available on our webpage. Let me remind you that some of our comments may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our filings with the SEC. You'll also notice that today's press release refers to both GAAP and ongoing earnings. Since it wasn't a material difference between GAAP and ongoing earnings, we'll refer to GAAP earnings during this morning's discussion. I will now turn the call over to Ben.

Benjamin G.S. Fowke III

Thanks Paul and welcome everyone. This morning we reported third quarter 2009 earnings of 221 million or $0.48 per share compared with 223 million or $0.51 per share in 2008.

In a few moments Dave Sparby will walk you through the results. I'd like to focus my comments on how we're performing relative to our expectations from the beginning of the year.

Let me begin with sales, going into 2009, we forecasted weather normalized electric sales would be roughly flat with 2008. As you are well aware electric sales nationwide had been adversely impacted by the economic down turn.

And while the impact on our service territory has been less dramatic, year to-date weather adjusted electric sales are down 1.7%. As a result, we estimate that the decline in electric good sales reduced our year-to-date earnings by a little more than $0.02 per share.

However, the decline in electric sales has largely been confined to the C&I class and the impact has been partially mitigated by demand revenue. On a consolidated basis, our year-to-date residential weather adjusted sales have actually increased by 0.5%.

While the economy has generally been an issue for all companies across the United States, weather and tax issues have been the most significant drivers in the third quarter and year-to-date results for us. Year-to-date weather has reduced earnings by $0.06 per share with a majority of the impact in the third quarter.

In addition, we've experienced a higher than expected effective tax rate which reduced earnings by a little over $0.02 per share year-to-date.

Offset the impact of unfavorable weather, lower sales and a higher effective tax rate, we've taken actions throughout the year to reduce expenses in order to deliver earnings within our guidance range. As a result of these actions, we expect our 2009 earnings to be near the midpoint of our guidance range of $1.45 to $1.55 per share.

At the same time, we're meeting our financial objectives. We're also providing excellent customer service and reliability to our customers, where we've seen improvements in both customer satisfaction and reliability indicators in 2009.

So with that, I'll turn the call over to Dave Sparby, who'll walk you through the third quarter details and provide a regulatory update.

David M. Sparby

Thanks. As Ben mentioned we reported third quarter earnings of $0.48 per share compared to $0.51 per share a year ago.

Let's now take a look at the details, starting with the review on the quarterly results at each of our subsidiaries.

Third quarter earnings at PSCo were flat. The positive impact of the electric rate increase that went into effect in July was offset by rising costs and unfavorable weather.

At NSP-Minnesota, third quarter earnings declined by $0.05 per share. This decline resulted largely from cooler than normal temperatures, a higher effective tax rate and timing of nuclear outage costs.

At SPS, earnings increased by $0.03 per share for the quarter.

We continue to financial results due to 2009 electric rate increases in Texas and New Mexico and the resolution of fuel cost issues.

At NSP-Wisconsin, earnings were flat compared with third quarter last year.

As we look at the quarter on a consolidated basis there are lots of ups and downs that explain the $0.03 per share decline. So it can really be summarized in two words, weather and taxes.

We experienced very cool temperatures this summer which reduced earnings $0.05 per share when compared to normal temperatures and $0.04 per share when compared to last year.

Couple of interesting facts on third quarter weather. In Minneapolis, there were 40% less cooling degree days than normal. While in Denver, it was 26% less cooling degree days than normal. In addition, in both cities, there was less the half the number of days exceeding 90 degrees compared to normal which is just all another way of saying, it was really cool this summer.

Now as you read through our earnings release, you may have noticed that our quarterly effective tax rate was 38.4% for 2009 compared with 35.3% for 2008.

The impact of a higher effective tax rate reduced earnings by $0.02 per share. It was primarily due to the recognition of additional state unitary tax expense and the establishment of evaluation allowance against certain state tax credit carryovers. As a result, we now expect our annual effective tax rate to approach 36%.

Next I'll provide more detail regarding drivers that affect various lines of the income statement during the quarter. Electric margin increased by 85 million during the quarter. This was largely driven by rate increases in Minnesota, Colorado, Texas, New Mexico and Wisconsin. These rate changes increased electric margin by 98 million. Conservation revenue, non-fuel riders and the MERP rider all served to increase retail electric margin by a total of 27 million.

It's important to recognize that these increases in the conservation revenue recovery are largely offset by higher conservation and DSM expense. A couple of factors partially offset these positive results including cooler summer temperatures which reduced margin by 26 million, accruals to record a customer refund of 25 million. This adjustment largely related to a decision in the Minnesota rate case to extend the depreciable life of our Prairie Island nuclear plant.

This is offset by lower depreciation expense and finally, higher capacity cost primarily at SPS which reduced margins by 11 million.

Turning to expenses, third quarter O&M expenses increased about 44 million or 10% compared with 2008.

As we've discussed previously, in the third quarter 2008, the Minnesota Commission approved our deferral and amortization accounting recommendation for nuclear refueling outages effective to the beginning of 2008.

This decision resulted in a year-to-date reduction of previously expensed outage costs and the deferral of revenue associated with the recovery of the nuclear outage expenses.

The timing of this adjustment resulted in an O&M deviation of $27 million for the quarter. In addition, we have experienced rising benefit cost for pension, medical expense and higher nuclear operating costs. As Ben mentioned, we've taken action to manage our O&M expenses and will continue to so as we finish the year. While we're taking steps to reduce costs, we will not sacrifice customer service or reliability.

As you look at the quarterly deviations in our annual guidance, you will note that depreciation expense is lower than previously expected. This reflects the recent Minnesota Commission decision to extend the depreciable life of Prairie Island by 10 years which reduced both the rate increase and the depreciation expense.

Next, I'll touch on some recent regulatory developments and our major jurisdictions. First in Minnesota, the PUC recently approved $91 million rate relief based on a 10.88 return on equity.

The primary difference between our request and the level of the approved by the Commission was the recognition for rate making purposes of a 10 year life extension for our Prairie Island nuclear facility.

This decision lowered both our revenue requirement and our annual depreciation and decommissioning expenses by about $40 million. This adjustment will not affect net income but it will reduce cash flow. Overall, we view the decision as a constructive outcome.

In Colorado, we have a pending request seeking an electric rate increase of $177 million based on a 2010 forecast test year and an 11.25% return on equity.

In September 2009, interveners filed testimony recommending rate increases below our request based on an adjusted historic test year.

In mid-October, we filed our rebuttal testimony which included a proposed earnings test to address intervener concerns regarding the forward test year.

Hearings have started and we expect a decision before year-end with new rates effective January 2010.

While the intervener testimony is disappointing, we remain optimistic we'll reach a constructive outcome in this rate case much like we've done in the past.

In June, we filed a request to increase Wisconsin retail electric rates by 30 million and proposed no change in our natural gas rates. This request is based on an ROE of 10.75% and a 2010 forecast test year. Staff recommended a rate increase of 14.5 million based on a 10.75 ROE and a 51.6 equity ratio, about 6.5 million of this staff's recommendation is the result of changes in depreciation for the life of Prairie Island.

We expect a decision by year-end and new rates effective in January 2010.

Also in June, we filed a request to increase South Dakota electric rates by $19 million based on an ROE of 11.25% and a 2008 historic test year with adjustments for known and measurable changes.

This is the first rate case we filed in South Dakota since 1992. We expect a decision by year-end with new rates effective January 2010. That includes my prepared comments. Now I'd like to turn the call back to Ben for some closing remarks.

Benjamin G.S. Fowke III

Thanks, Dave. Historically, we've issued our next year's earnings guidance on our third quarter earnings call. However, due to pending rate cases, we plan to issue 2010 earnings guidance later in the year. Let me give you some insight into 2010.

The key driver is clearly the Colorado rate case where we expect a decision by year-end. Rate increases in Wisconsin and South Dakota will also have an impact, however, to a lesser extent.

We expect electric sales will bottom in 2009 and grow about 1% in 2010. While we continue to strive to keep costs down, we expect O&M expenses will continue to increase driven largely by nuclear costs, pension and medical expenses and plant additions.

Depreciation expense will increase and AFUDC earnings will decrease due to the completion of major projects like Comanche 3, Fort St. Vrain and the river side repowering.

In summary, the combination of cool weather, a higher effective tax rate and a sluggish economy has made it a challenging year. That being said, we remain committed to achieving our financial objectives and providing value for our shareholders. We're confident we will deliver earnings within our guidance range. So with that I'll turn it back over to Dave and open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). And our first question does come from the line of Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson - Glenrock Associates

Good morning guys.

David Sparby

Good morning, Paul.

Paul Patterson - Glenrock Associates

Just on the tax issue, how should we think of 2010, what's the tax rate that we should be thinking about now in 2010?

David Sparby

Paul we'll provide more guidance later in the year. One of the factors that affected our effective tax rate this year was bonus depreciation which will expire at the end of the year.

Paul Patterson - Glenrock Associates

Okay. And then when you talked about Colorado in the forward test year and your disappointing intervener testimony as you saw it. Is there any possibility of settlement in Colorado? Or we really passed that point and time?

David Sparby

Colorado is always the possibility for settlement up until the time of the Commission's decision.

Paul Patterson - Glenrock Associates

Okay. When we're talking about -- you guys have gone through a large number of rate cases, and by the end of this year or by the beginning of next year, really most of these things will be completed.

How should we think about the regulatory landscape or your plans to go in for additional regulatory relief or when you might need to do so?

Just sort of generally speaking after all that you've sort of accomplished so far, obviously depends on once you sort of get a certain degree in some of these jurisdictions that haven't come out. But could you give a little bit of a flavor for that?

David Sparby

Paul, at this time, we're looking at our gas assets here at Minnesota and considering a rate change in this jurisdiction, we're also looking at our wholesale rates in our Colorado jurisdiction and those are what we're seeing in the near-term for rate relief.

Benjamin G.S. Fowke III

Paul, this is Ben. I would just say it would -- we continue to invest very heavily in our infrastructure and into the environment within all our jurisdictions. So I think you can expect that we'll be filing rate cases fairly routinely in all our jurisdictions. But that's what we've been doing obviously in over the last few years.

Paul Patterson - Glenrock Associates

Okay. So by routinely you mean within 12 months or so we might be seeing new rate cases being filed on the -- and I know you guys will have a lot of clauses and stuff as well, so we might be actually seeing more general rate cases coming out of these jurisdictions the next?

Benjamin G.S. Fowke III

I wouldn't say every 12 months. Paul as you know one of the reasons -- one of the helpful things about riders et cetera is that it helps minimize the -- how often you have to file rate cases and how large those rate cases are and one of the things I think we've been successful in is not having to ask for double-digit kind of increases basically. So...

Paul Patterson - Glenrock Associates

Okay. And then just finally, when you're talking to your industrial customers and your large commercial customers, what is their expectation for the economy in 2010? Do you have any general sense as to what your people on the field are gathering from your discussions with major consumers of electricity?

David Sparby

Our estimates for sales as Ben discussed about 1% reflects generally the consensus of those customers Paul. We developed our forecast in part based on their expectations, together with our modeling of their historic usage and bringing that together with some broader indicators from global insights and we found in the areas we serve very much a consensus around that 1% figure. So it's a slow recovery.

Paul Patterson - Glenrock Associates

Okay. Thank you very much.

Operator

Our next question comes from the line of Dan Jenkins with the State of Wisconsin Investment Board. Please go ahead.

David Sparby

Good morning, Dan.

Dan Jenkins - State of Wisconsin Investment Board

Hi, good morning. I was curious on the O&M expense, the biggest side in those nuclear outage cost deferrals and so forth and kind of the change of the timing of that and I was wondering -- looking forward into 2010, how should we think about that, given the changes that have gone on there, do you expect that –to be basically flat year-over-year, go down based on schedule -- what should we be thinking there?

David Sparby

Dan, it will vary a little bit depending on the outage schedule but as we move through an outage of each of the units this year we will see that expense become much more normalized from year-to-year.

Dan Jenkins - State of Wisconsin Investment Board

Okay. And then similarly given the Comanche plant supposed to go online in the fourth quarter here, how will that impact O&M in 2010?

David Sparby

It will have an increase in our generation cost for O&M in PSCo.

Dan Jenkins - State of Wisconsin Investment Board

You have a sense of how big of an impact that will be?

David Sparby

I -- go ahead Scott Wilensky.

Scott Wilensky

It's around 16 million a year but that's part of rate request pending in Colorado right now.

Dan Jenkins - State of Wisconsin Investment Board

Okay. And then I was wondering if you have the year-to-date through September CapEx and cash flow from the operations?

David Sparby

Yes, cash flow for operations is 1.6 billion and CapEx is 1.3 billion.

Dan Jenkins - State of Wisconsin Investment Board

Okay. Thank you. That's all I have.

David Sparby

Thank you.

Operator

(Operator Instructions). And our next question does come from the line of Andrew Levi with Incremental Capital. Please go ahead.

Andrew Levi - Incremental Capital

Hi. Good morning guys.

David Sparby

Good morning.

Andrew Levi - Incremental Capital

I've just been watching your rate cases and recommendations and thing like that, is it becoming more difficult environment do you believe because doesn't seem like you're getting the same type of recommendations or increases or ROEs that you're able to get a year or two ago. Is the environment tougher and is it going to be tougher as you go in for more increases?

Benjamin G.S. Fowke III

Andrew, this is Ben Fowke and I just at the rate case, test the plan, I think a lot of people in this room are going to be -- I think it's proceeding just the way a typical rate case would and I think historically we've had some pretty constructive settlements. The last big one was in Minnesota where we settled with 10.88 and had a number of issues I thought constructively resolved as David mentioned on the call.

So I think one of the things we're done a good job is continue even in these troubled economic times is receive constructive regulatory outcomes and I think a lot of it has to do with the alignment we have with our stake holders and state policies that were implementing. Dave I don't know if you...

David Sparby

I agree.

Scott Wilensky

I think we're doing pretty well all things consider.

Andrew Levi - Incremental Capital

Thank you.

Operator

And at this time, there are no further questions. I would like to turn the conference to Dave Sparby.

David Sparby

I want to thank you all for participating in our third quarter earnings call this morning. I look forward to meeting with many of you at the EEI Financial Conference next week. In addition, I hope you will join us in New York on December 2nd for our Annual Investor Meeting.

This year we plan to introduce some new presenters that will provide unique perspectives on our company. If you have any follow-up question, Paul Johnson and the IR teams are available to take your calls. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the Xcel Energy third quarter 2009 earnings conference call. We do thank you for your participation on today's call. You may now disconnect your lines at this time.

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