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Xcel Energy, Inc. (XEL)

Q1 2007 Earnings Call

April 25, 2007 10:00 am ET

Executives

Ben Fowke - VP & CFO

Paul Johnson - MD of IR

Analysts

Charles Fishman - A.G. Edwards

Presentation

Paul Johnson

Thank you. And welcome to Xcel Energy's First Quarter 2007 Earnings Conference Call. I'm Paul Johnson, Managing Director of Investor Relations. With me today is Ben Fowke, Vice President, CFO of Xcel Energy's and several others who can help answer your questions.

This morning we are going to discuss first quarter, reaffirm our annual guidance, update you on a regulatory progress and talk about our construction projects. I also want to point out that there are slides that accompany the conference call there are posted to our web page.

Please let me remind that some of the comments we're about to make contain forward-looking information, significant factors that could cause results to differ are discussed in our earnings release and SEC filing.

With that, I'll turn the call over to Ben.

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Ben Fowke

Thanks, Paul. And welcome, everyone. This morning, we reported first quarter 2007 earnings of $120 million or $0.28 per share. This compares with $151 million or $0.36 per share for the first quarter 2006.

Before I get into the details, I'd like to put our first quarter results in perspective. Last fall when we developed our 2007 budget, we anticipated an earnings decline in the first quarter due to timing of O&M expenses, fuel recovery recognition, and short-term wholesale margins.

What we didn't anticipate this quarter were additional regulatory accruals for SPS and lower than expected weather adjusted sales. As a result, our first quarter results were about $0.03 below expectations. However, we remain confident that we will deliver earnings within our guidance range of $1.35 to $1.45.

So with that, let me tell you how we're going to get there. First, the results for the first quarter 2006 reflect about $17 million of fuel recovery timing issues. This result in higher margins and earnings for the first quarter, but subsequently reversed out later in the year. While these fuel-timing issues had no impact on the annual results, it's historic to quarterly comparisons.

Second, we expect our annual O&M expenses will remain consistent with our guidance. First quarter O&M expenses were 6% higher than last year. Driven largely by the timing of nuclear refuelling outages and employee benefit costs.

This isn't a trend we expect to continue. For example, we expect that our nuclear costs for the last nine months for 2007 will be about $17 million less than the same period in 2006.

Third, our weather adjusted electric retail sales grew about 1.4% for the quarter, which was lower than we expected. And while we've adjusted our annual sales growth guidance range downward to 1.4 to 2%, to reflect first quarter results, one quarter doesn't represent a trend. Last year, our weather-adjusted sales grew 1.8% and that's certainly in line with our long-term growth expectations.

Finally, we also expect additional revenue for the SPS electric rate case from minimum rate that were effective in April, and for the Colorado gas rate case where final rates should go into effect later this year. As a result, we're confident that we will deliver earnings within our guidance range and we are reaffirming a range of $1.35 to $1.45 per share.

With that overview, let me get into the details. First quarter earnings decreased by $0.08 largely due to higher O&M expenses, which reduced earnings by $0.04 per share, higher depreciation and amortization which reduced earnings by $0.02 per share and lower electric short-term wholesale and trading margins, which reduced earnings by $0.02 per share.

Looking at margins, our base retail electric utility margins were flat compared with the same period a year ago. This is largely driven by timing of fuel recovery and regulatory accruals at SPS, which offset margin increases from rate increases, riders and sales growth. Electric margin increased by about $34 million due to rate increases and rider recovery.

The Colorado electric rate increase, which was effective in January, increased margin by $27 million. Margin also increased by approximately $7 million for revenue collected under the Merck rider. We experienced weather adjusted electric retail sales growth of 1.4%, although sales growth was lower than we anticipated, an increased electric margin by $10 million.

In contrast, to our electric sales, our weather adjusted natural gas sales came in stronger than we expected. However, our natural gas business is a much smaller portion of our company so it's having a relatively minor financial impact. Regardless, we have revised our annual natural gas sales guidance upward, to reflect the first quarter's trends.

Offsetting these positive drivers were several items that reduced electric margin. In March, we reached a settlement in our SPS Texas rate case and fuel proceedings. We're also in settlement discussions to resolve SPS regulatory issues in New Mexico and with FERC.

As a result, we recorded $13 million in regulatory accruals for potential settlement. In general, these reserves relate to disputes regarding the use of system average fuel costs versus incremental costs.

As I've mentioned before, electric margin also declined approximately $17 million, because of fuel timing issues, which increased first quarter 2006 results, but were reversed out in subsequent quarters and didn't increase annual margin or earnings in 2006.

For example, we recognized about $10 million in additional fuel recovery in Wisconsin during the first quarter of 2006, because our fuel costs were lower than our base rates, but within the fuel calls ban as projected on an annual basis.

Later in the year, our fuel costs flipped outside of the ban so we accrued the refund of over recovered costs to our customers. We also recognize $7 million in the first quarter of 2006 for an expected change in the lost factor recovery at SPS. Later in 2006, we decided it was more appropriate to fully reserve for the change in methodology and we reversed the accruals.

Turning to short-term wholesale margins. As expected, short-term wholesale and commodity margins, declined by $15 million. Keep in mind that last year, most of our trading margins for the year were recognized in the first quarter.

This quarter's decline is consistent with our year-end guidance and reflects normal retail customer demand growth, which reduces our surplus generation available for sales. It also reflects the implementation of sharing mechanisms required by recent regulatory proceedings and a reduction in the availability of the coal fired king plant due to the Merck project.

Looking at operating expenses. First quarter O&M expenses increased approximately $26 million or 6%, driven primarily by the timing of scheduled nuclear plant outages. In addition, we experienced higher costs at our power plants and higher employee benefit costs. I want to emphasize that the level of our first quarter O&M expenses do not represent a trend.

Last year, we had two nuclear refueling outages. One in the second quarter, and one in the fall. This year we've had one nuclear refueling outage, and it was completed in April. Last year, on incentive compensation expense was higher in the fourth quarter.

This year we expect a more ratable pattern. We continue to expect our O&M expense will increase 2% to 3% over last year as reflected in our guidance range.

Moving on. First quarter depreciation expense increased $11 million or 5.3% driven about planned system expansion. Based on our current forecast, we’ve revised our annual depreciation expense guidance downward by 10 million money.

Finally, let me touch on taxes. Earnings for the first quarter of 2007 reflect an effective tax rate of 28.8%, which was 250 basis points higher than 2006. This is consistent with our annual guidance of an ETR in the range of 28% to 31%. So, that explains the quarterly deviations. Now let's discuss our rate cases.

I'll start with Texas, where we reached a unanimous stipulation agreement, which provides for an annual base rate increase of $23 million based on a black box agreement with no stipulated ROE or capital structure.

The agreement also addressed fewer reconciliation disputes. The settlement disallows approximately $27 million of SPS 2004 through 2005 fuel expense, which was accrued and expensed in prior years.

Importantly, it also clarified issues related to fuel cost allocation. All of SPSs existing long term capacity wholesale sales will be assigned system average costs for Texas retail ratemaking except for the sales to El Paso Electric, which will be determined by the commission separately. The settlement stipulates that any potential fuel disallowance for El Paso is limited to an annual amount of $6.3 million through 2008.

The settlement also allows for an interim rate increase associated with a purchased power agreement with lead power partners of approximately $1.5 million per month, from the date of commercial operations if SPS files a general rate case in 2008. Interim rates would be subject to a true up, based upon the outcome of the rate case proceeding and the actual capacity cost incurred.

As a result of the agreement, we determine it was appropriate to record additional regulatory reserves of $13 million as we attempt to settle similar fuel reconciliation issues in New Mexico and with FERC.

Based on the settlement, the ALJ authorized the implementation of an interim rate increase effective in April, pending a final decision from the commission. We expect the commission to consider the settlement and issue final rates effective in the second quarter of 2007.

I think that it's clear that the settlement was very comprehensive in nature and while we're disappointed with the size of the rate increase and disallowance of fuel costs, the settlement does resolve several issues related to the fuel reconciliation process, which created uncertainty for us. We look at the settlement as a first step in resolving uncertainties and improving the regulatory environment at SPS.

Moving to Minnesota. And our natural gas rate case, we recently filed rebuttal testimony and are now seeking a rate increase of $16.8 million. Interim rates subject to refund were set at $15.9 million, and went into effect on January 8th. Interveners filed testimony in March and hearings are expected in early May. We still expect the commission to decide the case this summer.

In Colorado, PSCo filed a request in December to increase natural gas rates by approximately $42 million. Interveners filed testimony in April and hearings are scheduled for early June. Colorado doesn't have interim rates, but we expect final rates to go into effect in the third quarter.

Looking ahead, we will file electric and natural gas rate cases in Wisconsin later this spring as required by law. Rates related to the Wisconsin cases will go into effect in 2008.

Now I'd like to quickly update you on our construction projects, which are progressing very well. We continue to make significant progress with our mission reduction effort in Minnesota. So far we've spent approximately $690 million, which represents 69% of the total capital expenditures related to Merck. The king plant is over 95% complete and should be back online in June.

Construction of the High Bridge plant is about 45% complete and the plant should be online in May of 2008. Riverside is about 5% complete and is scheduled to be operational in May of 2009 with significant portions of the project either completed or under contract, we now currently expect to earn an ROE of about 10.7% on the combined efforts.

The Comanche 3 construction is approximately 15% complete and we spent approximately $470 million, which represents about 35% of the estimated total cost. All major contracts are signed, design is about 75% complete and procurement is more than 95% complete. Comanche 3 remains on track and on budget.

In summary, while we're slightly behind for the quarter, we’re on track to deliver earnings within our 2007 guidance range. We continue to have an attractive investment pipeline. We continue to have success in getting the rules right as evidenced by recent passage of favorable legislation in our jurisdiction.

Our environmental leadership is second to none and we have a strategy that's working and will provide attractive returns well into the future.

So with that, let's open the lines up for questioning.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Charles Fishman of A.G. Edwards. Please go ahead.

Charles Fishman - A.G. Edwards

Good morning.

Ben Fowke

Hey, Charles.

Charles Fishman - A.G. Edwards

Hey, I just want to make sure I understand this. For SPS, you issued an 8k after the settlement in March. And it indicated you wouldn't have any more reserves to take. But I guess that was just for Texas. And the reserves you took in the first quarter were for FERC and New Mexico? Do I understand it correctly?

Ben Fowke

Yes. You've got it exactly right, Charles. That's exactly what happened.

Charles Fishman - A.G. Edwards

Okay. Then just a second real quick question. You have the legislation for accelerated recovery in Colorado for transmission, but you don't have it for the renewables. And I would assume then you are working on legislation to get that, too?

Ben Fowke

Well we have a rider mechanism in Colorado subject to a 2% cap that encourages favorable recovery for us in Colorado, Charles. Which would be forward-looking quick recovery.

Charles Fishman - A.G. Edwards

That's for transmission and renewables?

Ben Fowke

Yes.

Charles Fishman - A.G. Edwards

Okay. Thank you.

Operator

(Operator Instructions) At this time, I am showing no additional questions in the queue. I'd like to turn the call back over to management for any closing remarks they may have.

Ben Fowke

Well I appreciate the one question we had today, and I appreciate everybody listening in to the call and I look forward to seeing many of you at the AGA conference in Orlando next week. I am meeting with many of you there. In the meantime, if you have any follow-up questions, Paul Johnson will be available to take your calls. Thank you, everyone.

Operator

Ladies and gentlemen, this does conclude the first quarter 2007 earnings conference call. You may now disconnect. And we thank you for using AT&A Teleconferencing.

TRANSCRIPT SPONSOR

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