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Xcel Energy Inc. (NYSE:XEL)

Q3 2011 Earnings Call

October 27, 2011 11:00 AM ET

Executives

Paul Johnson, VP – IR and Financial Management

Ben Fowke – CEO

Teresa Madden – SVP and CFO

Scott Wilensky – SVP and General Counsel

Analysts

Greg Gordon – ISI Group

Paul Ridzon – Keybanc

Paul Fremont – Jefferies & Company

Carl Seligson – Utility Financial Experts

Justin McCann – S&P Capital

Ali Agha – SunTrust

Leslie Rich – JPMorgan

Sarah Acres – Wells Fargo

Paul Patterson – Glenrock Associates

Dan Jenkins – State of Wisconsin Investment Board

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Xcel Energy’s Third Quarter 2011 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode, and following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, October 27th, 2011.

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

Paul Johnson

Thank you and welcome to Xcel Energy’s third quarter 2011 earnings release conference call. I’m Paul Johnson. With 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 and Group President; Scott Wilensky, Senior Vice President and General Counsel, and George Tyson, Vice President and Treasurer.

Today, we’ll discuss our third quarter results and accomplishments. In addition, we’ll provide an update to our 2011 guidance and introduce 2012 guidance.

Please note that there are slides that accompany the conference call, which are available on our web page. In addition, please note 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.

Today’s press release refers to both GAAP and ongoing earnings. Third quarter 2011 ongoing earnings were $0.69 per share compared with $0.62 per share in 2010. Third quarter 2011 GAAP earnings were also $0.69 per share compared with $0.67 per share in 2010. Last year third quarter GAAP earnings include a non-recurring benefit of $0.05 per share related to the settlement of a law suit. Management believes ongoing earnings provide a more meaningful comparison of results, and are more representative of Xcel Energy’s fundamental earnings power. Therefore we will be discussing ongoing earnings today, during our review of third quarter results. Please see our earnings release for a reconciliation of GAAP to ongoing earnings results.

I’ll now turn the call over to Ben Fowke, who became CEO of Xcel Energy in August of this year.

Ben Fowke

Thank you, Paul, and welcome everyone. Let me just say that I’m truly honored to be CEO of Xcel Energy. We have a great company with a strong balance sheet, a sound strategy, a constructive regulatory environment, a visible pipeline of investment opportunities, engaged employees and a history of delivering on expectations while managing risk. I will build on our great tradition with an emphasis on improving earned returns, while continuing to bright our customers with safe, clean, reliable energy at a reasonable cost. So, with that let me turn to our results.

This morning, we reported third quarter ongoing earnings of $0.69 per share compared with $0.62 per share in 2010. These results represent a continuation of solid performance this year and give us confidence that we will deliver 2011 earnings in the upper half of our guidance range of $1.65 to $1.75 per share, which is consistent with our 5% to 7% earnings growth objective.

Now I’ll brief you on some recent developments, beginning with an update on our regulatory proceedings. This has been a busy one for us with several rate requests pending. As most of you are aware, we arrived at constructive settlements in North Dakota and New Mexico. In North Dakota, the commission recently held hearings on the settlement we reached with staff, which would result in a rate increase of about 14 million in 2011, and an additional spec increase of 2 million in 2012 if approved. This is a black box settlement which was based on a 10.4% ROE. The settlement represents approximately 76% of our requested increase. We also reached a settlement in our electric rate case in New Mexico; the black box settlement is unopposed, resolves all the issues and increases rates by 13.5 million effective January 2012. Here again, the settlement if approved represents approximately 68% of our requested rate increase.

We expect the North Dakota and New Mexico commissions to rule on these settlements by year end. We are also discussing a potential settlement agreement in the Minnesota rate case. While we believe our request in Minnesota is reasonable we think working towards a settlement has the potential to leave to a constructive outcome. Especially in light of the delays the case has experienced and considering the overall economic environment. If our efforts are successful we would expect that an agreement could be sent to the commission by year-end.

These settlements are up our evidence of our ability to effectively manage regulatory risk. The constructive outcomes if approved position us to continue delivering on our financial objectives in 2011 and beyond.

Next, I would like to comment on EPA’s recently issued Cross-State Air Pollution Rule or CSAPR, as you are probably aware CSAPR impacts our operations in Minnesota, Wisconsin and Texas. While we have proactively addressed environmental issues, the late inclusion of Texas and the required compliance by 2012 creates significant issues for SPS.

SPS has very limited options to comply with the rules by January 2012. This short timeframe does not allow for the installation of additional control equipment at our coal plants. In addition SPS doesn’t have many viable options to comply with the new rules due transmission constraints that limit energy import and the expected lack of a liquid allowance market in the region.

Xcel Energy is one of many parties challenging the recently proposed EPA rules. Over 45 petitioners including 13 states, several utilities and others, filed challenges to CSAPR in the U.S. Court of Appeals for the District of Columbia circuit. Twelve separate motions for stay including our motion are pending before the quarter. Although the outcome of any litigation is difficult to predict, we are confident in the strength of our challenges to the rule.

Clearly we are not alone in challenging these new rules and are encouraged that FERC Commissioner Moeller has stated that the timing of these rules is too aggressive and could hinder grid reliability. The EPA itself appears to recognize the potential problems with the rule and hence proposed modifications. But we don’t believe these adjustments go far enough to alleviate our concerns, we’re optimistic that a more reasonable time line may be established. To address CSAPR ultimately, we’ll need to increase our capital investments at SPS. We will update you on our plans, including an updated capital expenditure forecast at our analyst meeting in December.

Now most of our comments on our conference calls tend to focus on financial results. However, operational excellence is a cornerstone at Xcel Energy. Periodically, it’s helpful to provide an example to emphasize this point. This summer 80 mile per hour winds and rain damaged 94 miles of infrastructure including transmission lines, turbines, wind collectors and distributors lines in South Western Minnesota. I am pleased to report that we completed the design and reconstruction of 64 miles of transmission infrastructure and energized it with new and stronger structures in less than three months. The remaining wind collector feeders were completed in mid-October. The successful and timely completion of this project demonstrates the people, alliances resources and internal processes are in place to achieve outstanding results.

I would now like to introduce you to Teresa Madden, Senior Vice President and Chief Financial Officer. Many of you have met Teresa over the years at various investor conferences. I’ve worked with her for many years. She has incredible depth of understanding of every aspect of the company’s finances and I have every confidence that she will be an outstanding CFO. Teresa, the floor is yours.

Teresa Madden

Thanks, Ben for the kind introduction and good morning to everyone on the call. Today, I will discuss our third quarter results, our recent financing activity, update you on other pending rate cases and close with our 2012 earnings guidance.

Let’s begin with a review of the significant drivers on the income statement. Strong growth in the third quarter earnings was largely driven by a 139 million increase in electric margin. Significant drivers include a $41 million from interim and final rate in multiple states, a 29 million increase in revenue requirement reflecting the acquisition of two natural gas power plants in Colorado. This margin impact is partially offset by higher O&M, depreciation, property taxes and financing cost associated with these facilities, a $19 million increase from the higher sales as a result of warmer than normal weather and an 18 million increase for conservation and DSM revenue incentives.

Natural gas margins increased modestly by 4 million over the quarter. As you’re primarily aware, natural gas usage is relatively minor in the third quarter. Partially offsetting the improvement in our electric and gas margins were increases in a few expense categories that I will review. O&M expenses increased 23 million or 4.6% largely driven by increased plant generation, labor, and employee benefit costs. In addition, due to warmer than normal summer temperatures, we are seeing incremental O&M to ensure continued system reliability and high customer satisfaction. As a result, we now project our annual 2011 O&M to increase approximately 4.5%, which is modestly above our original guidance of an increase of 4%.

Also offsetting some of the improvement in margins was higher depreciation and amortization expense, which increased $21 million or 9.3%. The increase is driven by incremental capital investment including the Nobles Wind Farm that went into service in 2010 and the new two natural gas plants we acquired from Calpine. Higher property taxes, primarily in Colorado and Minnesota, led to a $7 million or 8.8% increases in taxes other than income.

Finally, during the quarter, we announced the redemption of $105 million of preferred stock and incurred a call premium of a little over $3 million, which is not tax deductible. These opportunistic financing streamlines, our capital structure and lowers our cost of capital.

Now I’ll review the results of each of our operating company. First, earnings in NSP Minnesota increased $0.05 per share, largely due to higher interim electric rates in Minnesota and North Dakota and conservation incentives, partially offset by higher O&M expenses, property taxes and depreciation expense.

Second Earnings at PSCo were flat for the quarter. Higher margins primarily due to weather were offset by higher O&M, property taxes and depreciation expense. Third, NSP Wisconsin earnings were also flat for the quarter. The positive impact of new electric rates was offset by higher O&M and depreciation expense.

Finally, earnings at SPS increased $0.02 per share, largely due to an electric rate increase in Texas and higher sales driven again by hot weather. Similar to our other OPCos, these gains were partially offset by higher O&M expenses, property taxes and depreciation expense.

Now turning to the balance sheet, we were very active on the financing front during the third quarter issuing $700 million of debt at very attractive interest rate. At PSCo, we issued $250 million at 30-year first mortgage bonds with a 4.75% coupon. At SPS, we issued $200 million of 30-year first mortgage bond at 4.5% which temporarily tied the record for the lowest 30-year coupon across all corporate sectors.

In addition at the holding company, we took advantage of historically low rates and issued $250 million of 30-year senior note at 4.8%, this represents the lowest 30 year coupon ever for a utility holding company bond. Earlier Ben provided an update on several of the rate cases in which we’ve either greed on are working towards a settlement. We do have a few other rate cases pending that are expected to be wrapped up by year end or in early 2012.

In South Dakota we filed request to increase electric rate by 14.6 million based on a 2010 historic test year adjusted for known and measurable changes and 11% ROE and equity ratio of 52.5% and an electric rate base of $323 million. There has been delayed in the South Dakota rate case process, and we don’t anticipate a decision until the first quarter of 2012. As a result we are planning to request interim rate to be affective in January of 2012.

At NSP Wisconsin we’ve filed a request with the Public Service Commission of Wisconsin to increase electric rates by $29 million and gas rates by $8 million. At filing this based on a 2012 forecast test year, 10.75% ROE and equity ratio of 52.5% and electric rate base of 718 million and a natural gas rate base of $84 million.

Earlier this month staff a testimony and recommended an electric rate increase of approximately $18 million and a natural gas rate increase of about $3 million both based on an ROE of 10.3%. The staff recommendation reflects a lower ROE and adjustments to nuclear costs, employee compensation and benefit as well as the recovery of future MGP cost. We filed our rebuttal testimony last week and expect to commission to rule on the case by yearend. We anticipate new rates to be effective in January 2012.

Looking ahead, we plan to file an electric rate case in Colorado during the fourth quarter. As you recall we are required to file an electric rate case in Colorado prior to April 2012. A few noteworthy items, we plan on requesting interim rate to be effective in the first quarter of 2012 and we are also discussing the possibility of a multiyear rate plan with key stakeholders to determine whether this approach can be implemented through this case.

Constructive outcomes in these cases combined with the anticipated approval of the settlements in New Mexico and North Dakota, as well as the constructed outcome in Minnesota are key components of our 2012 earnings guidance, which we are introducing today.

For 2012, we expect earnings to be in a range of $1.75 to a $1.85 per share, which is consistent with our 5% to 7% earnings growth adjusted. Using 2009 as the base here, the low end of the 2012 guidance range represents 5% compounded earnings growth with the upper end representing compound earnings growth of 7%.

Some of the key drivers for 2012 include very modest electric and gas sales growth including the impact of an additional way of sales due to the leap year, stepping rates in Minnesota, new rates in Wisconsin, South Dakota and New Mexico, increased rates from the planned 2012 Colorado electric case. Incremental revenue from various capital writers and finally increased an AFUDC equity earnings associated with our capital investment program. These drivers will be offset by higher O&M, depreciation and property taxes. For more information see our earnings release for a listing of our preliminary assumptions.

We plan to provide additional information related to our 2012 forecast including an updated five year capital expenditure plan at our analyst meeting on December 1St in New York. In closing we’re pleased to report another strong quarter. As we enter the last few months of 2011 Xcel Energy is well positioned for continued success. We are on track to deliver 2011 earnings in the upper half of our guidance range. We financed our growth as historically low interest rate. We’re continuing to demonstrate our ability to manage regulatory risk across several jurisdictions, and finally we’ve established 2012 guidance that is consistent with our earnings objective of 5% to 7% growth. That concludes my prepared remarks. Operator we will now take questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Keith (inaudible). Please go ahead.

Unidentified Analyst

Just a couple of quick questions. First of all I was hoping you could give us a little sense of what the other key stakeholders in Colorado, who they would be and some kind of read on how likely you think it is that a multi-year plan would be a possibility. And secondly I’d be interested in what your ‘12 guidance or outlook assumes about equity issuance?

Ben Fowke

Well, I’ll at least the first part of that question. Keith, I think our stakeholders in Colorado are just who you would think they would be. The commission itself, the staff, the consumer abdicate groups and of course, largest C&I type customers. So we’re working with all of those stakeholders now as we try to put together a plan that they can buy in to and that’s been a significant portion of our outreach efforts over the last year.

In terms of equity I’ll let Teresa, handle that.

Teresa Madden

In terms of equity we’re currently not planning to issue any equity outside of our DRIP programs for 2012. However, we will be opportunistic and if condition warrants we potentially could maybe enter into a forward equity sale. But currently no plans for any equity issuances outside just our normal DRIP.

Operator

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

Greg Gordon – ISI Group

I am glad I didn’t change jobs again. Your analyst day is going to be in early December and final mercury rules posting date has been delayed now till mid-December. So are still going to get a reasonably good read on what you think the potential environmental spend is going to look like or is that something that we’re going to wait for until after we see the final rule.

Unidentified Company Representative

Greg, I don’t know which rule you are referring to...

Greg Gordon – ISI Group

The mercury rule.

Ben Fowke

Yes, I think the biggest variable for us is going to be the CSAPR Rule. And that as you know as I mentioned in my remarks we are litigating, we’ll probably get some kind of response first quarter I think is what we’re anticipating next year. So that’ll be a little bit later most likely than when we are at the analyst meeting. But we have run various scenarios on how we would respond and how we can respond to CSAPR and we’re going to share that with you in December.

Now Greg keep in mind that last year when we issued the CapEx forecast, we had a placeholder for all of these EPA rules and if I recall correctly at SPS it was about 400 million during the five year timeframe. So we’ll update that obviously timing and some other things might change. But I think we are anticipating at some time having to having to do these things. We just weren't anticipating having to do it by January of this year, coming year.

Operator

Our next question comes from the line of Paul Ridzon with Keybanc. Please go ahead

Paul Ridzon – Keybanc

A couple of things can you kind of put bookings with the impact of trading and fuel swings were in the quarter. It looks like that might have driven part of the earnings.

Teresa Madden

In terms of trading it was very small, and when you say fuel, in terms of you referring to the deferred fuel adjustments?

Paul Ridzon – Keybanc

Yes.

Teresa Madden

That deferred fuel adjustment was actually in the third quarter of last year and it was around $20 million. So actually this year we don’t have any adjustments like that. So that’s the primary driver.

Paul Ridzon – Keybanc

Okay. Thank you again. With the expedition of the process for the Hampton-La Crosse line, how do you view that impact? Do you think it’ll get accelerated or does it make you feel comfortable with the current schedule?

Ben Fowke

It makes us feel comfortable with the current schedule, Paul.

Operator

Thank you. Our next question comes from the line of Paul Fremont with Jefferies & Company. Please go ahead.

Paul Fremont – Jefferies & Company

Thank you very much. Quick question just on understanding sort of the upcoming Colorado filing. Should we assume that just to stay even with where you are right now, you’re going to need to file at least for the $121 million of non-fuel expense that’s currently in the rider?

Scott Wilensky

This is Scott. We would need to incorporate the transfer of what currently in the PCCA rider for the Calpine assets into our base rate request. And you’re right, that’s about 120 million. We’d also anticipate that we’d have rate request that’s incremental to that.

Paul Fremont – Jefferies & Company

Okay, but in other words, the comparator then should be anything over and above 120 million would be essentially an increase over what you’re currently collecting in that state?

Scott Wilensky

That’s right and we actually noticed the filing, there is legal notice that would require that we indicate that 120 million is part of the request, but as we’ve tried to share this with our customers, we’ll indicate that the level we increase is, the true increase to customers build not the transfer the Calpine assets from the rider debase.

Paul Fremont – Jefferies & Company

And just as a point of clarification, I’m assuming that premium paid for the preferred stock is a non-recurring expense item even though it’s included in your ongoing EPS calculation.

Teresa Madden

It is non-recurring, that’s correct.

Operator

And our next question comes from the line of Carl Seligson with Utility Financial Experts. Please go ahead.

Carl Seligson – Utility Financial Experts

I’m somewhat concerned although it’s been beaten back on other places, about what’s going on in Boulder and the effect that that might have other Colorado communities as far as municipalization. Could you give us a few words on that?

Ben Fowke

Yes, the votes by ballot are due November 1st, so I’ll be able to tell you how it all turned out, pretty shortly. You know Carl, Boulder has had a history of wanting to municipalize. I don’t really don’t think it’s indicative of other cities and municipalities in Colorado. You know and just to reiterate, I mean we want to continue to serve Boulder, I think well, you might have be aware, Carl, we had a major snow storm in Colorado and it impacted Boulder. And I think it’s another example of the service we provide and we were prepared, we call crews up from SPS and out from Grand Junction, and we had them ready and available the night before the snow storm. So we do a pretty good job of serving, we do a good job of providing reliable energy and clean energy, and I sure hope the citizens see it that way too, if not we’ll work with them, and it will take a while, but we’ll figure out the fair price, so that our other customers in Colorado aren’t disadvantaged. But I don’t think, the short answer to your question is, that it’s a trend that you’re going to see across our jurisdiction.

Operator

Our next question comes from the line of Justin McCann with S&P Capital. Please go ahead.

Justin McCann – S&P Capital

Regarding the economic outlook in your service territories, in which state do you have the greatest concern?

Ben Fowke

Greatest concern?

Justin McCann – S&P Capital

Yes.

Ben Fowke

I would say that the states that we’re seeing the flattest sales would be Minnesota and in Colorado, which happens to be our two largest states.

Justin McCann – S&P Capital

All right.

Ben Fowke

We are seeing much greater sales in Texas and we’re seeing an uptick in Wisconsin as well. So you got to keep in mind though that when the recession hit the hardest a few years ago, we were much less impacted than other parts of the country. So we are not seeing that rebound, we continued to see sluggish and flat sales, but we weren’t hurt as bad others to begin with. And there are signs that the larger C&I customers are starting to pick up, they always had in Texas, but in other regions as well.

Operator

Our next question comes from the line of Ali Agha with SunTrust. Please go ahead.

Ali Agha – SunTrust

Ben or Teresa, I mean going back to your plans for equity issuance, I know in the past you’ve said no earlier than 2012, which would imply say ‘12 or ‘13 just given the CapEx program, is that still a fair way to think about it, I mean if it’s not ‘12, it’s likely ‘13, but you may be opportunistic in ‘12, is that the way we should be thinking about equity?

Teresa Madden

Well, as I’ve said before, we’re not planning any in 2012, but if we saw an opportunistic option, we may potentially sell an equity forward.

Ben Fowke

Ali, I don’t think there’s anything more we comment on related to equity. And as a point two, we’ve always said no equity in 11; we haven’t really talked about ‘12 before.

Ali Agha – SunTrust

Okay. That’s right. Maybe I was getting my ears mixed up.

Ben Fowke

Yes, I think what we have done Ali then is just give the amount of equity we need over multiyear timeframe and we look at market conditions and all the other things that you would think and we pick when the best time is.

Ali Agha – SunTrust

Okay. And then second question, just looking at the results as they’ve come true, say maybe on an LTM basis and I don’t know if you whether adjust or not, but can you just remind us what kind of lag is still in the system in terms of what the earned ROEs are versus authorized across the portfolio?

Teresa Madden

Sure, Ali. In terms of our earned ROE at the utility, there tends to be around an average of up to about 100 basis points. So we do pickup from leveraging the holding company about around 50 basis points. Hopefully that helps.

Ben Fowke

Well, Ali, you raised this question, I think it’s a great one. We certainly are going to address regulatory lag. We have the writers, we have the forward testers, but things like an expanded CapEx program sluggish sales, they’ve kind of kept those spinning our wheels on regulatory lag. Multiyear rate cases etcetera will help tremendously to close that lag and we’re under earning now. So I think we can close that gap that would be a nice pickup for us.

Ali Agha – SunTrust

Just to get a flavor I mean given the flurry of rate cases going on and so on, I’m just curious I mean that’s always that lag, but where would you say you are in the cycle, is it historically I mean the narrower than normal, wider, I mean just to get some flavor of how it’s looking?

Ben Fowke

I mean we’ve – we are enjoying some good weather this year always, so it’s a little bit – I would just say it’s normal and if there is anybody else who has a different break on it.

Teresa Madden

I think that’s correct.

Ali Agha – SunTrust

Yes. And then final question, looking at your remainder of PPAs with other IPPs. Are you seeing more opportunity today to do that Calpine type acquisition of assets or other conditions or the PPA terms not ripe today to replicate something like that?

Ben Fowke

Well, it’s a great question. We are always looking, we’re filing resource plans in our two major jurisdictions here over the next, I guess it would be the next month, and you will see what kind of resource we need and you kind of have to start there. Then we’ll work backwards with the opportunities that go with IPPs and PPAs. Always looking Ali if it makes sense and we’ll do it but I don’t see anything any, it’s kind of new neutral I guess is what I would say that this point.

Operator

Our next question comes from the line of the Leslie Rich with JPMorgan. Please go ahead.

Leslie Rich – JPMorgan

Hi. I wondered if I could go back to Texas for a minute for FPS and CSAPR assuming that you can’t install a scrubber in 15 minutes. And that you are forced to comply by 2012. I assume you would be purchasing emissions allowances, is that recoverable from customers in terms of a passer or would that be absorbed by shareholders?

Ben Fowke

No, that’s all what we would do is recoverable, Leslie I am not sure that there is much of an emission allowance market and that’s the problem. So when we think about what we would do, if we had a compliant 2012, we’d obviously wait to see if that emissions to market developed, but in the absence of that we would try to basically a lot of ways turn our system upside down and run gas plants more like base load plants and not run our coal plants nearly as often.

So the cost of that would be fuel and that fuel is that’s passed through to our customers. Obviously we don’t think that’s a good plan from a cost perspective and clearly it’s not a good plan from a reliability perspective. Hence the suit that we’ve filed and again I just think there has to be a more reasonable outcome than a 2012 compliance plan.

Leslie Rich – JPMorgan

So, if compliance was pushed off, say one year, would that yield the same strategy?

Ben Fowke

I think one year will be pretty tough too Leslie, I think it takes time to put, I think the plan would probably be SCRs and NCRs and Scrubbers and/or DCI technology and that takes time. So we would be looking for a longer timeframe than that.

Leslie Rich – JPMorgan

Okay. But importantly the environmental CapEx, the incremental fuel cost from coal gas switching and then the emissions allowance cost are all recoverable?

Ben Fowke

That’s our assumption. And that would be the best practice.

Operator

Our next question comes from the line of Sarah Acres with Wells Fargo. Please go ahead.

Sarah Acres – Wells Fargo

As a follow up to that question, as you see CapEx ramping at SPS, can you remind us what kind of recovery mechanisms you have in place that you are going to be spending a lot on environmental, do you have the writer and if don’t would you pursue a writer in Texas?

Ben Fowke

Well, the recovery platform at SPS has improved. We continue to make sure that we can continue to improve it. So at this point we don’t have a writer to cover these sorts of things, but I think we have the opportunity in just like we have in Colorado we are working with our stakeholders down there and I think we have a lot of stakeholder support to do the right thing for the system and get the kind of recovery we need to. So we are not there yet, but it’s my anticipation that we would have a good regulatory plan to go along with this, Dave or Scott anyone of you want to add anything.

Scott Wilensky

I would just add is we do have about 50% of our loan in the whole sale market there and that’s on a formula rate and that would be picked up immediately even without writer really for the states.

Sarah Acres – Wells Fargo

Okay, it’s great. And since the last quarter do you have any update or progress on potentially adding wind in South Dakota?

Ben Fowke

Are you talking about North Dakota?

Sarah Acres – Wells Fargo

Yes. I apologize; where (inaudible) was canceled then there might have been a follow on.

Ben Fowke

Yes. We continue to look for opportunities there and we don’t have anything to announce. But I can tell you that we continue to look for the opportunities and be in a position of with take care of production tax credit but obviously the math has to work for our customers as well.

Operator

Thank you the next question comes from the line of Scott (inaudible). Please go ahead.

Unidentified Analyst

Hi. Thank you. Can you give us a sense of any increase or decrease in pension expense you expect to see in ‘12 from ‘11 if all the marks were made today, with the returns and discounts rates and everything?

Teresa Madden

We are expecting to see some increase between ‘11 and ‘12 and I would say in general, it’s probably in the $30 million to $40 million range. And we do have that included in terms of our assumption. We have based that on a somewhat lower discount rate and we currently have in our 2011 at a 5.5% discount rate. So we have taken that into consideration. We do expect to see some increase, but we have factored that into our guidance.

Unidentified Analyst

Okay.

Ben Fowke

I just might add to your question that coming into the year, our plans were some of the better funded plans in the industry. We took a conservative approach with our plans. So while lower discount rates and asset performance in general hasn’t been stellar this year as well all know. I think we’re in a lot better shape and we’ll be in a lot better shape by the end of the year. So it’s an expense for us but we’re a better positioned I believe than most.

Unidentified Analyst

Okay, thanks. And then also just can you give us any color on why guys kind of like the forward sale equity mechanism versus any of the other options?

Scott Wilensky

I think the reason we like to forward is there is the ability to avoid the dilution impact. There is a cost to use in a forward and so you want if you can use it, you don’t want to have something like that at least we don’t want it have it outstanding for a year. But if you like the price of equity and you want to delay the dilution for four to six months, it’s not a bad way to go.

Ben Fowke

I think if you have a large capital expenditure, it’s not a bad risk management tool either. But it’s just one tool that we have at our disposal.

Operator

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

Paul Patterson – Glenrock Associates

I just wanted to touch base with you on the wind contract that guys have with FPL. Did you guys already discuss this; I apologize because I’ve been distracted a little bit here and there.

Ben Fowke

You’re talking about the alignment of two projects?

Paul Patterson – Glenrock Associates

Yes, the one that decreased rates, same as you guys have made an announcement about and I was just wondering if you could elaborate a little bit about what sort of drove that and how things look in terms of the wind story out there in.

Ben Fowke

Yes, Paul I mean I think what drove our decision to pursue that is that we think the economics much less the environmental benefits speak for themselves, the pricing was so attractive that. One of the things that I think we probably need to do a better job of is just talk about the economics of our wind portfolio which average over years and as if the prices are lower today about $40 megawatt an hour which on an energy basis is not a bad hedge against natural gas. And this is the same kind of thought process which drove us to say, it’s a pretty good deal that’s offered to our customers. So I don’t know if you are interested in the approval process but...

Paul Patterson – Glenrock Associates

Well, I’d think you’d get it, I mean it seems like a remarkable I guess benefit for customers particularly, but I mean was that sort of a something particularly unusual about that project or is that’s what you are sort of seeing because of the what you’re seeing out there just with the fundamentals of the market. I just wonder if you add a little bit to it, I would talk to you guys offline about it, just sort of wondering if there is there any kind of remarkably sort of beneficial story.

Ben Fowke

I think it’s a product of lot of things, I mean if you look at wind; it tends to have some correlation with price of natural gas. There is a lot of uncertainty around production tax credits expire in 2012. So I think developers are interested in moving where they can and I think this is a great site with very good capacity and some new turbine technology. So, all those things came together to make for I think compelling economic deal. I mean there is other opportunities like that as well. But everything has to come together as this one did.

Paul Patterson – Glenrock Associates

Okay. I didn’t mean to cut you off on the regulatory processes, is there anything that we should be thinking about as being an issue there or I mean it just seems like it was such, I don’t know maybe I am missing, but I am sort of playing dunk, I don't…

Ben Fowke

No, I think from my perspective, I think the issue is whether or not we put this in our wind source program or whether or not we just think it up to normal system. I think the deal you are right is the economics are pretty compelling; it’s just a matter of how we want to introduce it into our portfolio.

Operator

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

Dan Jenkins – State of Wisconsin Investment Board

I was just wondering, I noticed in your discussion on the Minnesota rate case, you mentioned that their decision to delay the (inaudible) power upgrades. And I was wondering if you could talk a little bit about what went into that decision and how we should think about that plant going forward?

Ben Fowke

Sure, Dan it’s really two drivers, one we have some delays in equipment and we also are seeing some delays in the NRC license and so all those things together let’s just push it off to a scheduled refueling in the spring of 2013. So it’s just simple as that really.

Dan Jenkins – State of Wisconsin Investment Board

Okay. So it’s just held outside of the rate period, say it will just be done at that in a couple of years as opposed to…

Ben Fowke

Yes. It will be picked up in the rate case that we file.

Dan Jenkins – State of Wisconsin Investment Board

Is there the amount of the up rate still expect to be the same and so forth?

Ben Fowke

Yes. It’s still economic and it’s still about the same.

Dan Jenkins – State of Wisconsin Investment Board

Okay. I also noticed you mentioned in our financing plans that you plan to refinance the two issues that are maturing in 2012, well, do you expect any need for debt financing beyond just the refinancing of those two issues in 2012?

Ben Fowke

Yes. We’ve got 450 million maturing at NSP Minnesota, 600 million at (inaudible) and we would expect incremental debt issuance beyond that and.

Dan Jenkins – State of Wisconsin Investment Board

Do you have a size of potentially range of…?

Ben Fowke

We’re still working through the numbers. I mean, it’s probably I would say between the two of them, you’ll see a couple of hundred million more of debt. And we’ll also look at NSP Wisconsin and SPS; there could be some smaller issuances there.

Dan Jenkins – State of Wisconsin Investment Board

Okay. And then somewhat related to that, since you have 2012 guidance does the CapEx plan for 2012 still pretty much in line with what you’ve reported before or do you have any additional color you can give us on 2012 CapEx?

Ben Fowke

We’ll update our CapEx working forecast on December 1st our Analyst Day, Dan. So, we’ll give you a new 12 to 16 forecast. I mean this CapEx forecast will go up a bit.

Operator

Thank you. There are no further questions in queue. I’d like to turn the call back over to Teresa for closing remarks.

Teresa Madden

Thank you for participating in our third quarter earnings call. I look forward to meeting with many of you at the EEI Financial Conference in November, and at our Analyst Meeting in New York at New York Stock Exchange on December 1st. If any of you have any follow up questions, please contact Paul or the IR team, and thanks a lot.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. We’d like to thank you for your participation. Also, if you’d like to listen to a replay of today’s call, please dial 303-590-3030 or 800-406-7325 and enter the access code 4475769. Again, thank you for your participation, and you may now disconnect.

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